May 14, 2018
Agency yields increased across the curve last week, moving in lock-step with the rise in Treasury yields. Two-year Agency yields increased by 4 bps to 2.59%, 5-year Agency yields improved 5 bps to 2.92%, and yields on 10-year Agencies were higher by 2 bps to 3.27%.
Yield spreads for Agency bullets compared to Treasuries were unchanged, while yield spreads on callables to Treasuries were mixed. Spreads for callable Agencies tightened 1 to 3 bps on the short end of the curve (2- and 3-year finals), but widened 1 to 7 bps on maturities of 10-years and greater. As seen below, Agency callables with 10-year finals remain appealing from a relative value perspective as current spreads compare favorably to their 12-month averages.
For investors that can handle the optionality, certain callable structures with 10-year finals compare favorably to bullets because of the enhanced relative value on a yield spread basis (see graph below).
The following table reflects last week’s total issuance and call activity across GSE issuers:
Last week, Federal Home Loan Bank passed on its global bond issuance slot. The highlights of the agency coupon calendar in the upcoming week will be Freddie Mac’s announcement tomorrow of any plans to sell reference notes and FHLB’s announcement on Thursday of any plans to sell global bonds.
Notable agency activity last week included:
Ricky Brillard, CPA
Vining Sparks, IBG