June 11, 2018
Agency yields increased across the curve last week, moving in line with the rise in Treasury yields. Two-year Agency bullet yields increased 3 bps to 2.56%, 5-year bullet yields increased 4 bps to 2.87%, and 10-year bullets increased 5 bps to 3.25%.
Yield spreads for Agency bullets versus Treasuries were unchanged across the curve, while spreads on Agency callables mostly tightened after widening over the past month. Spreads for callables were unchanged for 3-year maturities and tightened by 2 to 3 bps for maturities of 5 and 10 years. The only callable agencies that widened during the week were those with 15-year finals, cheapening by 3 basis points for less structured product and by 15 basis points for longer lockout terms. Despite the slightly tighter spreads on the intermediate part of the curve, callable yields regardless of final maturity are trading within 8 bps of their 12-month highs.
Callables with 5-year finals are trading at the highest yields and widest spreads in more than 5 years and look attractive given the amount of price risk. As highlighted in the graphs below, less structured 5-year callables yield nearly 3.30% and are trading at 42 bps versus bullets (+50 to Treasuries).
The following table reflects last week’s total issuance and call activity across GSE issuers:
The Federal Home Loan Bank passed on its Global issuance slot on June 5th, marking the 5th time out of its 8 issuance dates it has skipped this year. Freddie Mac announced the issuance of $2.25Bn in new 5-year Reference Notes on June 7th. The Notes are due June 19, 2023 and were priced at +10 bps to Treasuries. On Thursday June 14th Fannie Mae will announce any plans to issue Benchmark Notes. Next Tuesday, June 19th, marks the next slot for Freddie Mac to issue Reference Notes.
Senior Vice President