May 15, 2017
Agency yields rose for most of the week and then reversed course on Friday with the release of weaker-than-expected core inflation data for April. For the week, two-year Agency yields declined by 3 bps to 1.36%, 5-year Agency yields fell 4 bps to 1.95%, and yields on 10-year Agencies were lower by 3 bps to 2.70%.
Yield spreads for Agency bullets compared to Treasuries were stable last week, but Agency callables tightened 1 to 3 bps. The tightening trend in Agency callables has been largely driven by downward movement in implied volatility in swap markets. Fed Funds Contracts have moved in accordance with the greater likelihood of a June rate hike, while 3-month LIBOR has remained stable. Heavy corporate bond issuance has also influenced yield spreads in the Agency sector.
For investors looking to harvest gains, consider selling Agency callables due to the increased level of demand in the secondary market.
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG