June 17, 2019
Both bullet and callable agencies largely moved in line with sovereign debt after recent weeks of widening. Yields on 3- and 5-year agency bullets ended the week down 2-3 basis points and now yield 1.87% and 1.94%, respectively. Judging by Fed funds futures contracts, the bond market continues to price in just over two 25 basis point rate cuts by the end of 2019. The spread between 2- and 10-year Treasurys remained stable at ~24 basis points, quite flat but on the steeper end of the trading range over the past 6 months. For investors looking for yield, or some pickup in yield for added duration, the agency curve maintains its steepness for maturities of 5 years and longer: while there is only a ~4 basis point difference between 2- and 5- year agency bullets, the slope of the agency curve increases to ~45 basis points between 5- and 10-year bullet maturities.
Agency bullets basically moved in lockstep with Treasury yields last week, leaving spreads unchanged. Callable agencies moved in roughly the same way. As highlighted in the charts below, agency bullets are on the wider end of this year’s trading range judging by G-spreads (in gray, right axis). Spreads on 5-year bullets remain at their recent double-digit-wide high-water mark of the past month; bullet spreads are still below the highs from the beginning of the year but certainly wider than the range from mid-April to mid-May. Obviously, absolute yields are down sharply this year for nearly all fixed income sectors, but the cheapening of agency bullets has allowed investors to find the same lockout and positive convexity as Treasurys with a pickup in yield.
The below table reflects last week’s total issuance and call activity across the primary GSE issuers. Agency issuance was elevated again at approximately $5.1 billion. Call volume declined to $1.7 billion but should continue to be heavy over the coming weeks and months. As mentioned over the 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.
Last week both Fannie Mae and Freddie Mac both passed on their issuance slots to announce new large bond deals. None of the major GSE issuers have issuance dates scheduled for this week. Any large agency bond issue announcements will pick back up next Tuesday with Freddie Mac’s upcoming issuance slot.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP