Agency Update

January 31, 2022

It was another rollicking week in the financial markets as the Fed held its January meeting where they reiterated the need to hike rates soon, telegraphing a 25-basis point hike at their March meeting.  Treasury yields on the front end of the curve rocketed higher yet again, with the 2-year increasing another 16 basis points while the 5-year yield moved higher by 5 basis points.  The 10-year yield, however, has been rangebound since the beginning of the year and ended last week up only a basis point to 1.77%.  The spread from 2- to 10-year sovereign yields continues to narrow, declining by 15 basis points last week to a mere 61 basis points, the yield curve’s flattest level since October 2020 and down a full 100 basis points from the peak last year.  Judging by how Treasury yields have moved in recent weeks, market participants seem to be acknowledging the need to hike rates to curb inflation but do not foresee the Fed being able to raise rates much above 2.00% or so without tipping the economy into recession.  Time will tell and, in the meantime, heightened market volatility will likely continue.

Spreads on agency bullets and callables were both little changed last week.  Bullet spreads were unchanged, while callables tightened marginally on the longer end of the curve.  Turning to the calendar this week, it will be another busy one.  Both January ISM indices will be released, and as both surveys were conducted during the height of the Omicron surge, both indices will likely point to another month of weakness after a disappointing December.  The January jobs report will be released this Friday, which could show similarly tepid gains in nonfarm payrolls, but given how tight the labor market appears to be, the market reaction could be rather muted.

Agency bullet were unchanged last week, and bullets continue to trade right on top of Treasurys.  Bullets with 3- and 5-year terms trade at approximately 1- to 2-basis point spreads to Treasurys, while 10-year terms are trading at +20 to Treasurys.   Callable spreads were unchanged on the week except for 15-year terms, which tightened by a basis point.  The charts below show that yields on 3- and 5-year callables continue to increase to 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 quadrupled to $8.3 billion while call volume fell to $125 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 Freddie Mac passed on its Reference note issuance slot.  This Wednesday, February 2nd, Fannie Mae has its second Benchmark slot of the year.  The Federal Home Loan Bank has its next Global issuance slot next Wednesday, February 9th.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks

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