July 15, 2019
For the first time since April, yields in the intermediate portion of the Treasury curve edged higher over consecutive weeks. Much of the move in yields appeared to be based on the rather dovish testimony from Federal Reserve Chair Jerome Powell to Congress, indicating the FOMC will likely loosen monetary policy at their upcoming meeting. Despite the market backup on the longer end of the curve, yields on 2- and 3-year agency bullets ended the week lower by 2-4 basis points and now both yield 1.91%. Yields on 5-year bullets rose by 1 basis point to 1.97%. As measured by the spread between 2- and 10-year Treasurys, the yield curve steepened by 9 basis points and ended Friday at 28 basis points.
Agency bullet spreads tightened on the week and are back to levels not seen in a month. For instance, 5-year bullets are now trading at 10 basis points over Treasurys. From a relative-value standpoint, the cheapest part of the curve still appears to be for maturities of 6 to 7 years. For investors that can assume the duration, spreads on 6-year bullets increase to approximately 20 basis points and are now approximately 25 basis points for 7-year bullets. Spreads on callable agencies also tightened versus sovereign debt for most tenors and call structures.
The below table reflects last week’s total issuance and call activity across the primary GSE issuers. Agency issuance more than doubled to $5.2 billion while call volume increased only marginally to more than $2.6 billion. Given the still-low market rates, GSE call activity will likely continue to be elevated for the foreseeable future. As mentioned in previous weeks, portfolio managers can go to the Client Portal on the Vining Sparks website to view updated cash flow projections for any callable bonds that may be rolling off soon.
Last Tuesday, the Federal Home Loan Bank announced a $300mm reopening of the November 16, 2028 Global note. New outstanding par amount for the note is now $2.05bn (CUSIP 3130AFFX0). Freddie Mac has its next issuance slot this Wednesday, July 17th. Next Wednesday is the upcoming announcement date for Fannie Mae to issue new Benchmark securities.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP