January 7, 2019
Even with the holiday-shortened week, there was no lack of volatility in financial markets last week. Treasury yields ended the week lower and the yield curve flattened somewhat. The yield curve remains inverted between 1 and 7 years. Last week agency bullets mostly moved in line with Treasuries. Bullet yields for 3-year maturities declined 2 basis points to 2.59%, and 5-year bullet yields fell 6 basis points to 2.67%.
After widening out in recent weeks, last week agency bullet spreads were mostly unchanged to slightly tighter versus government debt. Bullets in the 5-year part of the curve are trading near 17 basis points above Treasuries, still well above the upper single digits from the first of October and near the highest level since early 2016. Callable bonds cheapened slightly compared to Treasuries. As highlighted in the graph below, spreads on less-structured 5-year callables are at the highs of the past 5 years and appear to be relatively attractive given the recent bond market rally. If investors are comfortable with the duration, spreads on callables with maturities 10 years and out are near the highest point of the past decade.
The following table reflects last week’s total issuance and call activity across GSE issuers:
Freddie Mac passed on its first issuance data of the New Year last Thursday. This week Fannie Mae has an issuance date on Tuesday, January 7th. This Thursday, January 10th, is the next issuance date for the Federal Home Loan Bank.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP