June 19, 2017
Agency yields declined across the curve in response to weaker inflation data and despite the 25 bps rate hike by the Fed. On the week, two-year Agency yields declined 4 bps to 1.37%, 5-year Agency yields fell 4 bps to 1.84%, and yields on 10-year Agencies decreased by 8 bps to 2.53%.
Yield spreads for Agency bullets compared to Treasuries contracted by 1 to 2 bps, while yield spreads on Agency callables tightened 3 to 7 bps, depending on the structure and call tenor. Weak supply and the low level of implied volatility are largely responsible for the downward trend in callable yield spreads.
Investment activity picked up following the inflation miss, as investors took advantage of the market rally and sold front-end bullets. Proceeds were generally redeployed into the belly of the curve (3- to 5-year bullets and callable structures with similar finals).
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG