Agency Update

July 27, 2020

The bond market had another relatively uneventful week and Treasury yields continued to grind lower.  Yields are now at or near record lows for maturities of 2 to 7 years.  The 10-year yield declined by 4 basis points to 0.59%, its lowest weekly close on record, and is now within striking distance of its all-time low of 0.54% set in March of this year.  Spreads on agency bullets and callables were both little changed last week.  Most of the economic data continues to show that the economic recovery is slowing, which should provide additional impetus for Congress to get another aid package agreed upon before their August recess.  The GOP plan is expected to be unveiled early this week.  There is a lot more on the calendar this week as second quarter corporate earnings season concludes, the Fed’s July meeting wraps up on Wednesday, and on Thursday the market will get its first look at what is expected to be a historic contraction in GDP for the second quarter.

Spreads on agency bullets were essentially unchanged last week while callables tightened on the front end of the curve.  Callable issues with 2-year maturities tightened by roughly 2 basis points for most call structures.  Internal activity continues to show many depositories buying securities with longer maturities than was typical in the past.  The shortest maturity with a 1.00% yield continues to be in the 7-year area of the curve.  Many portfolio managers are buying even longer 10- to 15-year maturities, with yields reaching approximately 1.25% to 1.65%.  While these longer bonds have relatively high price volatility in rising rate scenarios, most balance sheets show enough asset sensitivity to take on longer duration in the bond portfolio.

The following table reflects last week’s total issuance and call activity across the primary GSE issuers.  Total issuance increased to $12.9 billion while call volume was flat at $6.1 billion.  Callable owners can continue to expect heavy call volume, and for specific dates and amounts, be sure to log in to the Client Portal on the Vining Sparks website.

Last week Freddie Mac announced a dual-tranche 2- and 5-year reference note that printed at +9.5 and +21 basis points, respectively.  The Federal Home Loan Bank passed on its issuance slot last Thursday.  This week Fannie Mae has an issuance slot on Wednesday followed by another one next Monday.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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