March 9, 2020
Treasury yields ended last week down another 33 to 40 basis points for 2- to 10-year maturities, similar in magnitude to the move from the week before, and already this morning the curve has moved down another 20 to 25 basis points. In overnight trading the 10-year Treasury yield fell to as low as 0.31% and the 30-year bond reached 0.70% (not a typo); yields on both have since increased by more than 20 basis points since. Only minutes after the open this morning the S&P 500 hit the -7% circuit breaker, halting trading for 15 minutes. Stock prices improved somewhat after trading was resumed but the major U.S. stock indices are flirting with bear market territory (defined as -20% from a recent peak). Driving the market moves is a combination of the increasingly rapid spread of Coronavirus around the world as well as the beginning of a price war in oil over the weekend. The financial markets are clearly flashing a warning sign, and likely signaling recession. After the Fed cut the overnight target rate by 50 basis points at an impromptu meeting last week, the bond market is now pricing in the likelihood of the Fed easing at least another 75 basis points at their March meeting on the 18th. Fixed income investors can likely expect the overnight rate to be near zero before summer arrives.
As with basically all bond sectors, agency bullets and callables continued to widen last week. Most callable investors are unsurprisingly looking for greater call lockout, typically either 6 months or 1 year until the initial call date. The below graphs show more structured 3- and 5-year callables with 1-year lockouts, which have each widened by approximately 20 basis points over the last several weeks.
The following table reflects last week’s total issuance and call activity across the primary GSE issuers. Total issuance declined to $6.1 billion while call volume nearly tripled to $23.1 billion. Callable owners can likely expect all call options to be exercised at the next opportunity given that market rates are at or near all-time lows.
Last week both Fannie Mae and Freddie Mac passed on their issuance slots. Freddie Mac has another Reference note issuance slot this Thursday. The Federal Home Loan Bank has its next Global slot next Wednesday, March 18th.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP