January 8, 2018
Agency prices declined last week, boosting yields higher as investor sentiment remained positive despite a slightly disappointing jobs report. The US economy added 148,000 jobs in December, undershooting consensus expectations for a gain of 190,000. That said, November data was revised up, the unemployment rate remained unchanged at 4.1% and average hourly earnings ticked up, rising 2.5% year-over-year. On the week, two-year Agency yields increased 7 bps to 1.99%, 5-year Agency yields improved 7 bps to 2.34%, and yields on 10-year Agencies were higher by 6 bps to 2.82%.
Over the last two weeks, yield spreads for Agency bullets compared to Treasuries were unchanged except for 2-year bullets, which experienced a tightening of 2 bps. Yield spreads on Agency callables widened 1 to 6 bps, depending on the structure and call tenor. In the near term, expect agency note spreads to move in recent ranges, although 3-year spreads could be pushed tighter on the roll to a new 3-year Treasury note this week.
The following table reflects the last two week’s total issuance and call activity across GSE issuers:
|Federal Farm Credit Banks||705,000,000||29,000,000|
|Federal Home Loan Banks||1,698,000,000|
|Federal Home Loan Mortgage Corp||1,645,000,000|
|Federal National Mortgage Association||–|
|Federal Agricultural Mortgage Corp||5,000,000|
The highlight of the agency issuance calendar in the upcoming week will be Freddie Mac’s announcement on Wednesday of any plans to sell reference notes.
Notable activity last week included:
- Callable FHLMC with a 5-year maturity
- Portfolio managers gravitating to the Federal Farm Credit name due to the shift in relative value
Ricky Brillard, CPA
Vining Sparks, IBG