Agency Update

June 8, 2020

Treasury yields steadily increased throughout the week, the selloff fueled by optimism about an economic recovery, and the yield curve steepened to a level not seen since March.  The jobs report on Friday further encouraged the optimism—the market had projected another sharp drop in payrolls in May (down 7.5mm), but instead the report showed strong payroll gains (up 2.5mm).  Many workers that were suddenly unemployed in March and April appear to have returned to work in May, and government relief efforts like the Paycheck Protection Program seemed to help get laid off workers back to work more quickly than they otherwise might have.  Treasury yields for 2-year maturities increased by 5 basis points, the 5-year increased by 16 basis points, and the bellwether 10-year surged by 24 basis points.  The steepening action left the 2s-to-10s spread at 0.69%, roughly 20 basis points above the trading range of the past couple of months.  Unsurprisingly, agency bullets and callables traded modestly tighter versus Treasury yields with the selloff.  This week’s calendar is decidedly quieter, and the highlight is Wednesday when the FOMC concludes their June meeting.  The market will get a look at the Fed’s updated Summary of Economic Projections (including the “dot plot”) and how much economic strength the Fed members anticipate will be recovered by year-end.

Agency debentures, both bullets and callables, reverted to a tightening trend that had largely been put on hold in recent weeks.  Agency bullets tightened by the most in the intermediate and longer portion of the curve, with 5-year bullets tightening by approximately 3 basis points, and 10-year bullets moved 7 basis points tighter.  Most callables across the curve and for a range of call structures tightened by roughly 2 to 5 basis points on the week.  Given last week’s selloff, bond buyers looking to hit a 1.00% yield can now focus on the 6-year part of the curve (~1 year shorter than this time last week).  Also, because of the selloff, discount callables are in greater supply and allow for a bit of a yield bump should the bond market rally (and the callable is subsequently called).

The following table reflects last week’s total issuance and call activity across the primary GSE issuers.  Total issuance declined to $6.3 billion and call volume increased to $8.5 billion.  Callable owners can continue to expect heavy call volume, and for specific dates and amounts, be sure to log in to the Client Portal on the Vining Sparks website.

Last week Freddie Mac passed on its issuance slot.  This Wednesday the Federal Home Loan Bank has an announcement date to issue Global notes, and next Wednesday Fannie Mae has its next Benchmark issuance slot.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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