July 2, 2018
Agency yields declined across the curve last week, moving in line with the flattening Treasury curve. Two-year Agency bullet yields decreased 2 bps to 2.59%, 5-year bullet yields increased 3 bps to 2.82%, and 10-year bullets fell 4 bps to 3.16%.
Yield spreads for Agency bullets versus Treasuries were unchanged across the curve, while spreads on Agency callables widened. Spreads for callables increased 4 bps for 3-year maturities and cheapened by 3 bps for maturities of 5 and 10 years, regardless of structure. Wider spreads on callable product essentially offset the week-over-week decline in Treasury yields, and spreads remain near the highs of the past year.
Less structured callables with 5-year finals are trading at the highest yields and widest spreads in more than 5 years and still look attractive given the amount of price risk. As highlighted in the graphs below, 5-year callables with three-month lockout periods yield approximately 3.20% and are trading at 48 bps versus Agency bullets.
The following table reflects last week’s total issuance and call activity across GSE issuers:
There were no large agency bullet issues scheduled for announcement in the previous week. The Federal Home Loan Bank issued two $1 billion floaters on Tuesday. Given the holiday on Wednesday, there are no large agency bullet issues scheduled for this week.
Senior Vice President