July 8, 2019
The holiday-shortened week was relatively quiet, but it was not without meaningful data releases, the most significant of which was the June jobs report on Friday. The report was stronger than the market had anticipated after recent softness on the labor front and yields shot higher as a result. Yields on 2- and 3-year agency bullets ended the week up 12 basis points at 1.95% and 1.92%, respectively. The intermediate and longer parts of the curve did not increase by as much as the front end, and 5-year bullets rose by 7 basis points to 1.96%. Although the strong jobs report clouds the path of monetary policy, the market is still pricing in a 25 basis point rate cut by the Fed at the end of July (while the odds of a 50 basis point cut have been reduced to less than 5%). As measured by the spread between 2- and 10-year Treasurys, the yield curve ended last week at its flattest since the end of May. Agency bullet yields mostly moved in line with sovereign debt.
Agency bullet spreads were unchanged on the week and remain at the wider end of the recent trading range. With the yield curve as inverted as it is, yields of 2.00% or greater for bullets can still be found on the front end the curve (approximately 1 year and in), but investors must still extend out beyond 6-year maturities to reach the same yields for longer maturities. Spreads on callable agencies were basically unchanged last week and are also trading on the wider end of the recent trading range.
The below table reflects last week’s total issuance and call activity across the primary GSE issuers. Agency issuance and call volume was less than $2.5 billion last week but will likely continue to be elevated for the foreseeable future. As mentioned in previous weeks, 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.
Fannie Mae announced a $2 billion Benchmark note last week, its first since February. The 5-year note priced at +9 basis points and prints today, July 8th. This Tuesday, July 9th, is the next announcement date for the Federal Home Loan Bank to announce issuance of Global notes. Freddie Mac has its next issuance slot next Wednesday.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP