May 1, 2017
After declining for two consecutive weeks, Agency yields experienced a modest improvement last week. Two-year Agency yields increased by 6 bps to 1.33%, 5-year Agency yields climbed 4 bps to 1.91%, and yields on 10-year Agencies were higher by 3 bps to 2.65%.
Yield spreads for Agency bullets compared to Treasuries tightened 1 to 2 bps on the week, while spreads for Agency callables tightened 1 to 5 bps, depending on the structure and call tenor. The tightening reflects a decrease in implied volatility, which is now bk to pre-election levels.
Many callable structures still compare favorably to bullets because of the enhanced relative value on a yield spread basis. After declining rapidly in October last year, yield spreads on callables to Treasuries have rebounded and remain above their 12-month averages.
Last week, activity was heavily focused on 3-year callable Agencies with one-time call features. There was also demand for 7YR NC 2YR structures.
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG