March 23, 2020
It appears that the new normal, at least until the impacts of COVID-19 become more concrete, is extreme volatility across all financial markets. Last week the Fed began its quantitative easing program by buying Treasury and mortgage-backed securities and, unsurprisingly, Treasury yields fell on the week by roughly 25 basis points in the intermediate portion of the curve, and the 10-year note fell by 13 basis points. Given last week’s emergency Fed rate cut to a range of 0.00-0.25%, the yield curve is now at its steepest slope in nearly a year as measured by 2- to 10-year Treasurys. This morning the Fed announced extensive additional asset purchases, including not just Treasurys and residential MBS, but also commercial MBS, corporates, and municipal securities. Sovereign debt yields are moving lower on the news, and after nearly all spread products have widened in recent weeks, spreads in these various sectors will likely tighten back in to some degree.
Agency bullets and callables both continued their widening streak last week. Agency bullets with 2- to 5-year maturities widened by 7 to 10 basis points and as of Friday were trading at 30 to 35 basis point spreads over Treasurys. Callables also widened to a similar degree in the 2- to 5-year part of the curve. As mentioned last week, agencies in general are now trading at the widest spreads in approximately 8 years. The difference between less-structured and more-highly-structured callables (highly structured = more call protection) has narrowed in recent weeks and points to some relative value in longer lockout paper.
Last week the Federal Home Loan Bank passed on its Global slot. Fannie Mae has a Benchmark slot this Tuesday, March 24th. There are no major issuance dates scheduled for next week, and Fannie Mae and Freddie Mac each have issuance slots the following week.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP