July 23, 2018
After steadily flattening over the last several weeks, the Treasury curve reversed course and steepened by several basis points, with Treasury yields rising across the curve. Agency bullet yields moved in line with Treasuries. On Friday the spread between 2- and 10-year Treasuries increased to 30 basis points after falling to as low as 25 basis points the week before. Two-year Agency bullet yields increased 1 basis point to 2.65%, 3-year bullets increased 2 basis points to 2.75%, and 5-year bullet yields cheapened by 4 basis points to 2.85%. Ten-year Agency bullet yields increased by 7 basis points to 3.19%.
Yield spreads for Agency bullets versus Treasuries were unchanged, while spreads on callable Agencies tightened modestly. Callable spreads for 2-3-year maturities declined by 2-3 basis points, and spreads for 5-year callables tightened by 5 basis points. Despite the tighter spreads, callables still appear attractive from both a relative value and absolute yield basis. For instance, less-structured 3-year callable spreads are near the highs of the year at 30 basis points and yield just below 3.0%. Additionally, 5-year callable yields remain near the highest levels in more than 5 years and are still trading at more than 50 basis points over Treasuries.
The following table reflects last week’s total issuance and call activity across GSE issuers:
Last Tuesday, July 17th, Freddie Mac passed on its slot to issue Reference Notes, marking the 6th time out of 9 announcement dates it has passed on this year. On Thursday the 19th Fannie Mae also declined to issue Benchmark Notes, its 9th instance of 12 dates this year on which to pass. This Wednesday, July 25th, is the next date for the Federal Home Loan Bank to announce issuance of Global securities.
Senior Vice President