June 24, 2019
Treasury and agency yields continued to move lower last week. Yields on 3- and 5-year agency bullets ended the week down 3 to 5 basis points and now stand at 1.81% and 1.91%, respectively. Judging by Fed funds futures contracts, the bond market is now pricing in better than 50/50 odds of three 25 basis point rate cuts by the end of this year. With investors now anticipating looser monetary policy in the near future, the yield curve between 2- and 10-year Treasurys steepened to roughly 29 basis points, its steepest slope since November. Agency bullets widened marginally versus sovereign debt.
Agency bullet spreads widened by approximately 1 basis point for 1- to 10-year maturities and bullets are now trading at the widest levels since the first quarter. As highlighted in the graphs below, absolute bullet yields are at the lowest point since October 2017 despite spreads widening recently. Bullet buyers must now extend out beyond 6-year maturities to reach 2.00% yields. Callable agencies also cheapened up somewhat versus Treasurys.
The below table reflects last week’s total issuance and call activity across the primary GSE issuers. Agency call volume increased to more than $6 billion and 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.
None of the major GSE issuers had issuance dates scheduled for last week. Freddie Mac has its next issuance slot tomorrow, June 25th. Fannie Mae’s next announcement date to issue Benchmark securities is next Tuesday, July 2nd.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP