March 30, 2020
The bond market was a bit calmer last week as the Fed ramped up its quantitative easing program to inject liquidity and stabilize financial markets. Because the Fed’s QE purchases include Treasurys, agency residential and commercial mortgage-backed securities, corporates, and municipals, but no agency debentures, the agency sector has been less affected besides movements in Treasury yields. Last week sovereign debt yields declined a much more modest 6 to 8 basis points in the 2- to 5-year part of the curve, while the 10-year note fell by a more significant 16 basis points week-over-week. Agency paper largely tightened versus Treasurys. Sovereign debt yields are moving lower this morning, mostly for maturities beyond 3 years, and the 5-year Treasury reached its lowest yield on record at 0.33%. Because of the natural time lag to economic data releases, much of the economic impacts from coronavirus have not shown up yet except for the colossal spike in initial jobless claims and historic plunge in Markit indices last week, but that will change this week. The biggest market movers will be the ADP employment report and March ISM manufacturing index Wednesday, this week’s initial jobless claims on Thursday, and finally the March jobs report and ISM non-manufacturing release on Friday. Expect heightened volatility surrounding these releases, but the market has largely priced in dramatically weaker readings.
After steadily widening since the end of January, both agency bullets and callables mostly tightened back in last week. Bullets were most affected in the 2- to 3-year part of the curve, tightening by 8 to 9 basis points, while 5- to 10-year bullets tightened by 3 to 5 basis points. Despite last week’s tightening, however, bullets remain wider year-to-date by roughly 20 to 25 basis points for 2- to 10-year finals. The same is true for callables, which tightened back in but remain 30+ basis points wider than at year-end. Of course, absolute yields are significantly lower, as highlighted in the charts below.
The following table reflects last week’s total issuance and call activity across the primary GSE issuers. Total issuance declined modestly to $6.5 billion while call volume declined to $5.0 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, and for specific dates and amounts, be sure to log in to the Client Portal on the Vining Sparks website.
Last week Fannie Mae passed on its Benchmark slot. There are no major issuance dates scheduled for this week, and Fannie Mae and Freddie Mac each have issuance slots next week.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP