July 16, 2018
Last week the Treasury curve continued its recent flattening trend, and Agency yields moved largely in line with Treasury yields. On Friday the spread between 2- and 10-year Treasuries reached its lowest point of this economic cycle at 25 basis points. Two-year Agency bullet yields increased 4 basis points to 2.64%, 3-year bullets increased 2 basis point to 2.72%, and 5-year bullet yields cheapened by 1 basis point to 2.81%. Ten-year Agency bullet yields increased by 1 basis point to 3.13%.
Yield spreads for Agency bullets versus Treasuries were unchanged across the curve, while spreads on callable Agencies widened modestly. Spreads for callables increased by 2 basis points for maturities of 2 through 5 years, and spreads widened by 4 bps for 10-year callable paper. Callable product, particularly in the 3- to 5-year part of the curve, appears attractive on a relative value basis—yields are at or near the highest point of the past twelve months.
As highlighted in the chart below, less-structured 5-year callables look particularly cheap. Spreads to Treasuries have widened significantly since the beginning of the year and now stand at 59 basis points, 12 basis points above the average for 2018. Spreads tightened to within 25 basis points in January, and to within 37 basis points as recently as April.
The following table reflects last week’s total issuance and call activity across GSE issuers:
Last Tuesday, July 10th, Fannie Mae passed on its slot to issue Benchmark securities, marking the 8th time out of 11 announcement dates year-to-date it has passed. This Tuesday, July 17th, Freddie Mac will announce any plans to issue Reference Notes. Next Wednesday, July 25th, is the next issuance date for the Federal Home Loan Bank Global securities.
Senior Vice President