March 14, 2022
Bond yields charged significantly higher last week despite the continued war in Ukraine, more than reversing the move from the previous week. Treasury yields across the curve ended the trade session Friday at their highest weekly close of the current rate cycle (with further yield increases so far this morning). The biggest moves came in the belly of the curve as 3- and 5-year Treasury yields finished the week higher by 31 basis points, while 2- and 10-year yields each increased by 26-27 basis points. As can be seen in the graph below, the yield curve remains particularly flat beyond ~3 years. The February CPI report released on Thursday unsurprisingly showed continued price pressures, and with the Fed holding their March FOMC meeting this week, it is all but certain that they raise overnight rates by 25 basis points. The quarterly Dot Plot will also be updated at this meeting, which is expected to show that Fed members anticipate further tightening throughout the rest of the year. Investors will be interested to know what the consensus is among FOMC members for year-end overnight rates—the market continues to price in at least another 100 basis points worth of hikes before the end of the year. The Fed faces a delicate balancing act of normalizing policy to tame inflation but without tightening too quickly, pushing the economy into another recession.
Agency bullet spreads were unchanged on the week and remain at single digit spreads out to at least the intermediate portion of the curve. Callables largely tightened in last week after spreads had widened out to start the month. Spreads on most structures in the 2- to 5-year portion of the curve fell by 4-5 basis points, with 10-year paper tightening by approximately half of that. The only widening that took place was on the longer end as spreads on 15-year terms increased by a couple of basis points. As can be seen in the charts below, the move higher in Treasury yields plus still relatively wide spreads makes intermediate term callables somewhat attractive.
The following table reflects last week’s total issuance across the primary GSE issuers. Total issuance declined to $3.2 billion while $45mm in agency calls were announced. For specific call dates and amounts for individual bond portfolios, be sure to log in to the Client Portal on the Vining Sparks website.
Last week the Federal Home Loan Bank passed on its Global issuance slot. There are no major issuance dates scheduled this week as the FOMC holds their March meeting. Fannie Mae has a Benchmark slot scheduled for next Tuesday, March 22nd, and the Federal Home Loan Bank has another Global issuance date the following day.
Senior Vice President, Investment Strategies