March 7, 2022
The war in Ukraine continued to dominate financial markets last week and the flight-to-quality trade sent Treasury yields lower across the curve. The yield curve flattened dramatically as the 2-year yield fell by 9 basis points while the 10-year yield fell by 23 basis points, leaving the 2s-to-10s spread at only 25 basis points to end the week, its flattest level since early 2020. Keeping the front end somewhat elevated is the fact that the FOMC is set to begin raising overnight rates at their meeting next week, which Jay Powell confirmed in his Congressional testimony last week, stating he would support a 25-basis point hike. Amidst still-hot inflation, the strong jobs report to end last week only reiterated the need, and capacity, for the Fed to begin normalizing monetary policy.
Agency bullet spreads were unchanged on the front end of the curve but widened somewhat for intermediate and longer maturities. Amidst such heightened volatility, callables widened dramatically, with 3- and 5-year tenors widening by 5 basis or more, and 10-year structures widened by approximately double that. This week begins the quiet period ahead of the Fed’s March meeting, and the economic calendar is a bit on the lighter side, but there is one final CPI report due on Thursday ahead of the Fed next week. At this point it would take something severe to prevent the Fed from raising the overnight rate by 25 basis points, which is all but baked in according to Fed funds futures.
Agency bullet spreads were mostly unchanged out to 3-year maturities, while 5- and 10-year bullets widened by 1-2 basis points. Bullet spreads remain near all-time lows despite widening some last week. Callables, however, widened meaningfully. Most 3- and 5-year structures widened by approximately 5 to 8 basis points, while 10- and 15-year finals widened by 10 to 16 basis points. As can be seen in the charts below, the combination of lower Treasury yields but wider spreads meant intermediate-term callable yields remained largely unchanged.
The following table reflects last week’s total issuance across the primary GSE issuers. Total issuance was flat at $4.5 billion while a mere $17mm in agency calls were announced. 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 Freddie Mac passed on its Reference note issuance date. The Federal Home Loan Bank has a Global issuance slot this Wednesday, March 9th. There are no major issuance dates scheduled for next week during as the FOMC holds their March meeting.
Senior Vice President, Investment Strategies