January 29, 2018
Last week, Agency yields rose across the curve, particularly for shorter term maturities, which flattened the curve. Two-year Agency yields moved higher by 6 bps to 2.15%, the 5-year Agency yield increased 2 bps to 2.53%, and the yield on the 10-year Agency was up 1 bp to 3.01%.
For the fourth consecutive week, yield spreads for Agency bullets compared to Treasuries were unchanged. Spreads for callable Agencies widened across the curve with larger movements occurring on structures with 5- to 15-year finals. Spreads with call tenors from 3 months to 1 year in these structures widened 5 to 10 bps. In the near term, expect agency spreads to remain in recent ranges.
Callable structures with 5-year finals compare favorably to bullets because of the enhanced relative value on a yield spread basis (see graph below).
Even though the curve has flattened, riding the yield curve is still a viable option for buyers of agency bullets with maturities as short as two years over a 12-month horizon (see table below).
The following table reflects last week’s total issuance and call activity across GSE issuers:
|Federal Farm Credit Banks||232,000,000||–|
|Federal Home Loan Banks||1,559,500,000||100,000,000|
|Federal Home Loan Mortgage Corp||195,000,000||125,000,000|
|Federal National Mortgage Association||190,000,000||–|
|Federal Agricultural Mortgage Corp||8,365,000||–|
On Wednesday, Fannie Mae, as was generally expected, passed on its second benchmark note supply slot of the month. There are no large agency bullet issues scheduled for announcement in the upcoming week. The Federal Home Loan Banks have the next scheduled supply, a Global Bond slot on February 7th.
Notable activity last week included:
- 22M of Federal Farm Credit bullets maturing between February 2018 and April 2019
- 9M of Federal Farm Credit callable in January 2019; maturing in 6 to 7 years
- 13.6M of Federal Farm Credit callable in February 2018; maturing in 12 years
- 8M of Farmer Mac bullets maturing in February 2020 and January 2023
Ricky Brillard, CPA
Vining Sparks, IBG