Agency Update

May 18, 2020

Treasury yields moved lower last week as the market digested a dramatic pullback in inflation, a spate of Fedspeak that downplayed the likelihood of using negative rates as a monetary policy tool, and a retail sales print on Friday that was somehow even worse than expected.  The 2-year fell by only 1 basis point while the 5- and 10-year fell by 3 to 4 basis points, although those declines have been more than erased with this morning’s trading.  Agency securities mostly continued to tighten versus government debt.  This week brings more commentary from Federal Reserve members, highlighted by Chair Powell’s Senate testimony tomorrow, plus the FOMC’s April meeting minutes will be released Wednesday, and several economic releases are scheduled for Thursday.

Both agency bullets and callables tightened on the week, a trend that dates back to the end of March.  Spreads remain wider compared to pre-coronavirus levels, so investors can likely expect the sector to continue to tighten towards historical averages.  Bullets with 2- and 5-year maturities tightened by 1 to 2 basis points.  Callables with longer finals tightened by the most, with moves in the double digits, while 5-year callables of varying structures tightened in by roughly 4 basis points.  Callables with 3-year maturities were the only underperformer as they widened by 3 basis points.  Vining Sparks customers were more active than usual in bullets last week, particularly for terms of 5 years and longer.  The agency bullet curve begins to steepen more significantly around the 6-year mark and beyond.

The following table reflects last week’s total issuance and call activity across the primary GSE issuers.  Total issuance increased marginally to $7.4 billion and call volume also increased to $7.1 billion.  Callable owners can continue to expect heavy call volume, and for specific dates and amounts, be sure to log in to the Client Portal on the Vining Sparks website.

Last week the Federal Home Loan Bank passed on its Global issuance slot.  This Wednesday Fannie Mae has a Benchmark slot, and next week Wednesday the FHLB has another announcement date.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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