March 28, 2022
Treasury yields rocketed higher again last week in what can best be described as a brutal and seemingly never-ending selloff in bonds to start 2022. The move in yields appeared to come in response to hawkish commentary by members of the Fed, including Chair Powell, who stated that the FOMC will tighten policy more aggressively should the data warrant it. He also said that the Fed is prepared to raise rates by more than 25 basis points “at a meeting or meetings,” which seems to hint at a near certain 50-basis point hike at the May and/or June meetings, and perhaps additional meetings if necessary. Treasury yields for 2- to 10-year terms surged by 33 to 40 basis points, the biggest move on the front end of the curve in more than a decade as the market prices in more aggressive rate moves by the Fed. The yield curve is now inverted from the 3-, 5-, and 7-year Treasury relative to the 10-year, increasing market participants’ concerns of a looming recession at some point. Agency bullet spreads were mixed, with 5-year bullets tightening and 10-year terms widening. Unsurprisingly, callables widened amidst the selloff.
The economic calendar this week is loaded with important data releases in addition to a few more Fed members scheduled to speak. The February PCE data will be released on Thursday ahead of the March jobs report Friday, which is expected to show further tightening of the labor market. The bond market will continue to look for signals as to the timing and number of Fed rate hikes this year, particularly for hikes of 50 basis points. As of this writing, according to Fed funds futures, the market is pricing in another ~200 basis points worth of rate hikes by year-end, with strong odds of a hike of 50 basis points at the upcoming May Fed meeting.
Agency bullet spreads were mixed, with 5-year bullets tightening by 2 basis points to a mere 3 basis points above Treasurys. Given such tight spreads, the Vining Sparks trade desk continues to move Treasurys in lieu of agency bullets. Bullets on the longer end of the curve widened, however, with 10-year terms widening by 3 basis points to 33 basis points over sovereign debt. Callables widened modestly on the front end of the curve, by 2 to 4 basis points for less structured paper in 2- to 3-year maturities. Callables on the longer end, with maturities of 10 or 15 years, widened by more than 20 basis points in some cases.
The following table reflects last week’s total issuance across the primary GSE issuers. Total issuance increased to $4.9 billion while call volume fell to $35 million. 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 Fannie Mae passed on its Benchmark slot. The Federal Home Loan Bank announced a $1 billion 2-year Global issuance that priced at +4.5. Freddie Mac has a Reference note slot scheduled for this Wednesday, March 30th. Fannie Mae has another Benchmark slot scheduled for next Tuesday, April 5th.
Senior Vice President, Investment Strategies