January 24, 2022
It was a turbulent week in the financial markets last week as investors continue to grapple with rampant inflation, slowing growth and rising interest rates as the Fed nears the end of its taper process ahead of future rate hikes, likely to begin in March. Treasury yields surged to start the holiday-shortened week, hitting cycle highs on Wednesday before retreating towards the end of the week amidst a sharp drop in equities. The 10-year ended the week down a basis point while 2- and 3-year yields increased by 3 to 4 basis points, further flattening the yield curve after steepening to start the year. The spread from 2- to 10-year yields is now down to 73 basis points, down by more than half from the 2021 peak last March.
Agency bullets widened on the week, a rarity these days, but bullets continue to trade at extremely tight spreads on a historical basis. Callables were mixed, tightening on the front end of the curve while widening in the 10- to 15-year portion. The calendar this week is rather full with the Fed’s January policy meeting that concludes on Wednesday followed by several impactful economic releases Thursday and Friday. The FOMC is expected to signal a rate hike coming at their subsequent meeting in March as the Committee attempts to normalize monetary policy following its historic accommodation. The Fed faces the challenge of remaining somewhat hawkish to tame inflation but without roiling the broader financial markets in the process.
Agency bullet spreads ticked higher last week, with 3- and 5- year terms widening by a basis point while 10-year tenors widened by 2. Callables widened a bit on the longer end of the curve while tightening in most 2- and 3-year structures. As evidenced in the charts below, callables in the belly of the curve remain near cycle highs. Bear in mind, though, that even though the Fed is expected to begin raising rates, callables offer little protection to eventual falling rates.
The following table reflects last week’s total issuance and call activity across the primary GSE issuers. Total issuance declined to $2.0 billion and call volume fell to $340 million last week. For specific call dates and amounts for individual bond portfolios, be sure to log in to the Client Portal on the Vining Sparks website.
Last week the FHLB passed on its Global issuance date just as it did two weeks prior. Freddie Mac has a Reference note issuance date scheduled for this Thursday, January 27th. Fannie Mae has its second Benchmark slot of the year next Wednesday, February 2nd.
Senior Vice President, Investment Strategies