June 26, 2017
Agency yields were mixed but relatively stable last week. For the week, two-year Agency yields were unchanged at 1.37%, the 5-year Agency yield held firm at 1.84%, and yields on 10-year Agencies decreased by 4 bps to 2.49%.
For the second consecutive week, yield spreads for Agency bullets compared to Treasuries contracted by 1 to 2 bps. Yield spreads on Agency callables widened from the previous week but are now largely in line with the average levels observed two weeks ago. Weak supply and the low level of implied volatility are largely responsible for the recent contraction in yield spreads.
Call activity accelerated last week with the Agencies collectively redeeming nearly $5bn in paper. As a result, activity in the sector improved as investors actively sought reinvestment options. Many focused on adding bullet structures in the belly of the curve (3 to 5 years). We also continued to see investors selling front-end bullets and extending out on the curve.
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG