July 26, 2021
In the past month, the highly contagious Delta variant has led to a parabolic surge in cases in the U.S., mimicking the recent waves seen in the U.K. and Israel, despite the strong vaccine penetration in all three nations. These developments have led to investors seeking safety haven assets like bonds, sending yields steadily lower since the end of June, although the market panic may have peaked this past Monday. The closely watched 10-year Treasury yield hit 1.13% on Monday, its lowest level since February, but finished the week only down a basis point at 1.28%. The belly of the curve did not hold up as well, with the 3- and 5-year Treasury yield each declining by 6 basis points on the week. Cases appear to be decisively rolling over in the U.K., however, which could make for a near-term bottom in bond yields. Last week spreads on agency bullets were basically unchanged while callables widened out versus Treasurys. After a couple of quiet weeks, this week’s economic calendar is rather full and features housing, consumer confidence, and inflation readings, plus the initial GDP estimate for the second quarter on Thursday. The FOMC also holds its July meeting this week, and while it is not expected that they adjust monetary policy, investors will again be waiting for any hints as to the timing of when the Fed may begin tapering asset purchases.
Agency bullet spreads were basically flat last week except for 10-year maturities, which widened by a basis point to 7 basis points. Agency callables widened a bit further on the week, with 3- and 5-year terms widening by 2-3 basis points. As can be seen in the graphs below, 3- and 5-year callables continue to trade near the same levels of the past several months, despite the recent volatility in Treasurys. Most of the purchase activity last week was in the belly of the curve, with 5-year maturities catching the most trades.
The following table reflects last week’s total issuance and call activity across the primary GSE issuers. Total issuance fell to $3.0 billion while call volume increased to $8.6 billion. For specific call dates and amounts for individual bond portfolios, be sure to log in to the Client Portal on the Vining Sparks website.
Last week Fannie Mae passed on its second Benchmark slot of the past two weeks. Freddie Mac has its only Reference issuance date of the month this Thursday, July 29th. Next week Fannie Mae has another Benchmark issuance data on Wednesday, August 4th.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP