July 31, 2017
Agency yields held steady for the short end and moved slightly higher for maturities beyond one year last week, partially reversing declines and the flattening trend from the prior two weeks. The agency market last week featured strong redemptions and net negative issuance, an expected outcome. This trend should continue into this week. Despite the negative change in supply, spreads versus Treasuries held up for must terms and structures.
Within the sector yield spreads did move around in helpful ways for investors seeking to diversify out of FNMA and FHLMC or who otherwise prefer the FHLB name, as yields on these names converged during the week, with the FHLB becoming less expensive on a relative basis.
Bullet and callable activity last week focused on the two- through five-year part of the curve. FNMA issued $2b of a 3yr FNMA Benchmark issue, with Farmer Mac and the FFCB also pricing significant levels of bullet debt last week. Callable activity featured a wide variety of terms and structures. Most of these featured final maturities between three and seven years, with some of the longer structures providing reinvestment for extension trades within the sector.
Notable activity included:
- Modest extension trades, with portfolio managers selling < 3yr maturities and buying five- to seven-year finals, both callable and bullets
- Portfolio managers gravitating to the FHLB name due to the shift in relative value, whereby this name traded in line with names that it usually trades at lower yields than
Director of Investment Product Strategies