March 16, 2020
It would not be an overstatement to call last week the wildest week in the market since the Financial Crisis of 2007-2008. It seemed that in the past week, equity and fixed income markets, the Fed, and American citizens all got roughly on the same page regarding the Coronavirus outbreak—it is now a foregone conclusion that the impacts of COVID-19 are going to be severe and felt in all corners of the economy. Treasury yields ended last week down marginally on the front end of the curve and higher on the long end, steepening the curve somewhat. However, thanks to the emergency Fed rate cut yesterday (Sunday) combined with $700 billion in quantitative easing over the coming months, Treasury yields are down 10 to 16 basis points across the curve this morning. Stocks opened the day limit down 5% and immediately hit the -7% circuit breaker, which occurred several times last week, highlighting the heightened volatility. This level of volatility is likely here to stay for the next several months as markets react to the depth and duration of the coming slowdown.
Unsurprisingly, agency bullets and callables both widened meaningfully on the week. Agency bullets with 2- to 5-year maturities widened by 14 to 17 basis points and are now trading at 23 to 25 basis point spreads over Treasuries. These are now the widest spreads on agency bullets in approximately 8 years. Callables also widened but not nearly to the same degree as agency bullets. Right now there is only a ~10 basis point difference between callables with 3-month versus 1-year lockout, which is basically minimal give-up for an additional 9 months’ worth of call protection—given the current market volatility, that seems like a small price to pay for the additional structure.
The following table reflects last week’s total issuance and call activity across the primary GSE issuers. Total issuance was flat at $6.1 billion while call volume declined to a still elevated $16.5 billion. Callable owners can continue to expect basically all call options to be exercised at the next opportunity given the current level of market rates.
Last week Freddie Mac passed on its Reference note issuance slot, and it does not have another issuance date until the 2nd week of April. The Federal Home Loan Bank has its next Global slot this Wednesday, March 18th, and Fannie Mae has a Benchmark slot next Tuesday.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP