January 27, 2020
The risk-off tone of the market over coronavirus fears sent Treasury prices sharply higher sharply last week, and the rally continues unabated this morning. Treasury yields declined by 6 to 14 basis points on the week for maturities of 2 to 10 years, with the larger moves coming on the longer end of the curve, and the curve ended the week at its flattest since early December. In fact, the curve has returned to slightly-inverted between 2- and 5-year maturities, which has not occurred since the end of November. Sovereign debt yields are down another 5 to 7 basis points this morning. After slowly grinding tighter for several months, agency bullets finally widened with the market rally. Investors will keep a close eye this week on news out of China regarding the deadly virus, and the FOMC meeting concludes on Wednesday—given the recent volatility, expect language reiterating the Fed’s high bar to raise rates anytime soon.
Agency bullet spreads remain very tight but widened last week, particularly on the longer-end of the curve. The agency bullet curve begins to steepen up past the 5-year part of the curve. Callable agencies also widened last week. As can be seen in the charts below, spreads on less-structured 5-year callables have declined but have held in better than their 3-year counterparts. With Treasury yields at their lowest levels since the first half of October, investors will likely look for any pickup in yield available.
The following table reflects last week’s total issuance and call activity across the primary GSE issuers. Both call and issuance volume remained elevated last week. The amount issued totaled $8.7 billion, and total called amount was more than $10.6 billion. Callable owners can likely continue to expect elevated call volume in their higher-coupon issues over the near term.
The Federal Home Loan Bank passed on its Global issuance slot last Wednesday. Freddie Mac has another Reference note announcement date this Tuesday, January 28th. The FHLB has another Global issuance date next Tuesday.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP