March 21, 2022
Treasury yields again moved higher last week as the FOMC announced their first-rate hike since 2018, with the Committee choosing to raise rates by 25 basis points. While the 25-basis point move came as expected, it was the tone of the meeting and the shift higher in the Dot Plot that surprised many. According to the new Dot Plot, the consensus among Committee members is that they expect to hike the equivalent of 7 times in 2022 and another 4 times in 2023, with balance sheet reduction to begin “at a coming meeting” (presumably announced in May to begin shortly thereafter). Treasury yields continued to make new cycle highs as 2- to 5-year yields increased by 19 to 22 basis points, while the 10-year increased 15 basis points to 2.15%. As can be seen in the graph below, the yield curve remains particularly flat beyond ~3 years, and in some cases is slightly inverted, which is a rarity at the beginning of a new tightening cycle. Agency bullet spreads were largely unchanged on the front end but widened for 10-year terms. Callables tightened on the week, with the biggest moves occurring in 2- to 5-year paper. More on the agency sector below.
The calendar this week is a bit lighter regarding economic data releases. However, there are a multitude of Fed members scheduled to speak, including Fed Chair Powell on the schedule for Monday and Wednesday. Investors continue to keep a close watch on developments in Europe regarding Russia and Ukraine, but inflation pressures and the Fed’s ensuring response appear to outweigh the current turmoil overseas.
Agency bullet spreads were unchanged out to 5-year maturities and remain in single-digit territory. Longer bullets, however, widened meaningfully last week, with 10-year bullets widening by 5 basis points versus Treasurys to their highest spreads since late 2020. Callables largely tightened in last week amidst the bond market selloff. Spreads on most structures in the 2- to 5-year portion of the curve fell by 5 to 7 basis points, with 10- and 15-year paper tightening by 2 to 3 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 rather attractive.
The following table reflects last week’s total issuance across the primary GSE issuers. Total issuance declined to $2.6 billion while call volume increased to $1.1 billion. For specific call dates and amounts for individual bond portfolios, be sure to log in to the Client Portal on the Vining Sparks website.
There were no major issuance dates scheduled last week during the March FOMC meeting. Fannie Mae has a Benchmark slot scheduled for this Tuesday, March 22nd, and the Federal Home Loan Bank has a Global issuance date the following day. Freddie Mac has a Reference note slot scheduled for next Wednesday, March 30th.
Senior Vice President, Investment Strategies