June 21, 2021
Volatility returned to the bond market last week in an almost violent way. Following the June FOMC meeting that showed not one but two 25 basis point rate hikes in the 2023 Dot Plot, Fed Chair Jay Powell reminded the market that the dots are a poor forecasting tool when it comes to monetary policy. During the press conference, he even said, “the dots are to be taken with a big grain of salt.” His rather dovish tone helped soothe markets, at least for a day, only for St. Louis Fed President Bullard to go on CNBC Friday morning to say that he expected that the Fed may begin raising rates in 2022. Following his rather hawkish comments, short- to intermediate-term bond yields increased sharply, while the long end of the curve unexpectedly pushed lower. As the day progressed, market participants seemed to realize they had lost their collective minds and, once sanity returned, bond yields ended the trading session nearly unchanged. On the week, however, yields for maturities out to approximately 7 years were up meaningfully after declining for 3 consecutive weeks. This week has the potential to be another relatively volatile one with plenty of economic data releases to sift through and another dozen or so Fed members scheduled to speak.
Agency bullets continue to trade near the tightest spreads on record, with 5-year bullets offered at approximately +1 basis point to Treasurys and 10-year bullets offered near +6. For this reason, the Vining Sparks trade desk continues to move a meaningful amount of Treasury paper to those looking for bullet structures. Agency callable spreads were mixed on the week, with longer maturities widening out while short to intermediate paper tightened by 1 to 4 basis points. The majority of the purchase activity remains 4- to 7-year maturities—as judging by the shape of the yield curve above, expect that trend to continue. As can be seen in the graph below, 5-year callables continue to trade near 1.00%, just as they have since the beginning of March. Yields on 3-year paper popped last week, and as can be seen below, more highly structured 3-year callables increased after drifting marginally lower for several months.
The following table reflects last week’s total issuance and call activity across the primary GSE issuers. Total issuance increased to $4.7 billion while call volume jumped to $7.7 billion. For specific call dates and amounts for individual bond portfolios, be sure to log in to the Client Portal on the Vining Sparks website.
As expected, Freddie Mac passed on its Reference note slot last week. Fannie Mae has a Benchmark slot this Wednesday, June 23rd. Freddie Mac has another Reference issuance date next Wednesday, June 30th.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP