Agency Update

July 22, 2019

The bond market was rather choppy last week as investors analyzed the most recent commentary from various Federal Reserve officials as well as a handful of economic data releases.  There no longer seems to be a question of whether the FOMC will cut rates at their meeting next week but by how much—at least a 25 basis point cut appears all but certain, with the possibility that the Fed could be more aggressive and cut the overnight rate by 50 basis points.  Yields moved lower last week after ticking higher the previous two weeks.  Yields on 2- and 3-year agency bullets fell by 6-7 basis points and now yield 1.87-1.88%.  Yields on 5-year bullets declined by 4 basis points to 1.92%.  As measured by the spread between 2- and 10-year Treasurys, the yield curve flattened by 4 basis points and ended Friday at 24 basis points.

Agency bullet spreads were mostly unchanged last week and remain on the tighter end of the trading range of the past month.  Callable agencies largely widened across the curve.  Investors can still reach 2.00% yields on the very front end of the curve but must extend out to approximately 6 years to see equivalent yields.

The below table reflects last week’s total issuance and call activity across the primary GSE issuers.  Call volume increased to nearly $7 billion last week and will likely continue to be elevated with rates at current lower levels. As mentioned over the past month, 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.

Freddie Mac passed on its issuance slot last Wednesday as it has all year and last issued a Reference note in June 2018.  This Wednesday is the upcoming announcement date for Fannie Mae to issue new Benchmark securities.  It announced a $2 billion 5-year deal earlier this month.  Freddie Mac has another issuance date next Monday.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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