January 25, 2021
Last week was a relatively quiet one in the bond market and Treasury yields remained in what appears to be their newly found trading range. The yield on the 10-year was essentially flat on the week and stayed within a few basis points of Friday’s closing level of 1.09%, and the 5-year declined by 2 basis points to end the week at 0.43%. The world watched as Joe Biden was inaugurated to become the 46th President of the United States and, as new Senators were sworn in, the Democrats cemented their slim majority in Congress. Almost incredibly, agency bullets continued to tighten on the longer end of the curve despite already trading at all-time tight spreads. Callables likewise tightened further, particularly for longer tenors. Looking to the week ahead, the FOMC concludes their January meeting on Wednesday, with Jay Powell’s usual press conference to follow. The financial markets would enjoy further clarity on the timing of when the Fed will begin tapering their asset purchase program, but anything substantive is unlikely to be announced this week. Besides the Fed meeting, there are several major releases on the economic calendar this week, highlighted by the initial Q4 GDP estimate on Thursday.
Written in this space last week: “Bullets are essentially trading on top of Treasurys out to 2-year maturities, and bullets are now at all-time tight spreads across the entire curve. Owners of large-issue bullets like Benchmark and Reference notes will have a hard time getting a better bid than now.” Somehow, agency bullets managed to tighten further still, with 3- to 10-year bullets tightening by approximately a basis point on the week. 10-year bullets are now trading at 10 basis points over sovereign debt. To put that in perspective, prior to 2021, the previous all-time tight spread level for 10-year bullets was 17 basis points, and the average spread over the past 5 years is 35 basis points. As little as 6 months ago, those same securities traded at 40 over Treasurys. The below charts outline how dramatically spreads have come in since last summer.
The following table reflects last week’s total issuance and call activity across the primary GSE issuers. Total issuance was halved to $3.1 billion while call volume increased to $6.7 billion. Callable owners can continue to expect heavy call volume, and for specific dates and amounts, be sure to log in to the Client Portal on the Vining Sparks website.
The Federal Home Loan Bank passed on its Global issuance slot last Wednesday. Freddie Mac has its second Reference note issuance date of the year this Thursday, and Fannie Mae has a Benchmark slot next Wednesday, February 3rd.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP