March 2, 2020
As written last week in the Agency Sector Update, “the COVID-19-led flight-to-quality sent safe haven assets screaming higher last week.” Perhaps “meandering” would have been a more appropriate word to use the previous week, while “screaming” should have been reserved for this past week. Treasury yields across the curve ended the week 32 to 44 basis points lower for Treasurys with 2- to 10-year maturities, a huge move in only 5 trading sessions. The flight-to-quality sent the 10-year Treasury yield to a new all-time low yield on Friday at 1.12% intraday before selling off late in the afternoon to end the day at 1.15%. The market moves were not finished, apparently, and government yields are down another 8 to 12 basis points so far this morning. Previously the market had fully priced in 50 basis points worth of rate cuts by the Fed in 2020—now the market is expecting those cuts to occur by April, with another 25 basis point cut by the end of July.
Agency bullets continued their recent widening streak last week. The biggest move in the sector occurred in callables, which makes sense given the heightened volatility. While most banks’ primary exposure to moves in interest rates is to falling scenarios, callables now look relatively attractive given the rate moves over the past year. Most of the activity in the space has been investors looking to pick up yield but sacrificing some yield for greater lockout. The below graphs show more structured 3- and 5-year callables with 1-year lockouts, which widened to more than 30 and 40 basis point spreads last week, respectively. Despite the wider spreads, absolute yields are now down close to the lows seen in mid-2016 following the Brexit referendum.
The following table reflects last week’s total issuance and call activity across the primary GSE issuers. Total issuance increased to $11.7 billion and call volume was basically flat at $8 billion. Callable owners can certainly expect elevated call volume in their higher coupon issues over the near term.
Last week Fannie Mae passed on its issuance slot and has now passed on 2 of its 3 slots for the year. Freddie Mac has a Reference note issuance slot this Thursday. This morning the Federal Home Loan Bank announced a $1 billion 6-month SOFR-indexed floating rate note and a $1 billion 2-year note that priced at +3 and +12, respectively.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP