May 4, 2020
Despite the busy week last week, highlighted by the FOMC meeting that concluded Wednesday on the heels of an economic release that showed an extreme plunge in Q1 GDP growth, Treasury yields largely held firm and remained in their recent trading range. Yields on 2- to 5-year Treasury notes fell by 2 to 4 basis points while the 10-year yield moved higher by a basis point. Agency securities continued to tighten versus government debt. This week will be decidedly quieter than last, with the most noteworthy calendar item falling on Friday when the April jobs report is posted. The market expects nonfarm payrolls to plummet by a historic 21 million and the unemployment rate to jump to 16%, and it would likely take something drastically different to meaningfully move the market.
Both agency bullets and callables tightened on the week. Bullets for 2- and 5-year maturities tightened by 2 basis points while 3-year finals tightened by 6 basis points. Despite the recent tightening trend, bullets with maturities of 3 years and out are still trading at double-digit spreads, and 5-year bullets still trading at spreads close to 25 basis points. As recently as mid-February, spreads for maturities out to 5 years were in the single digits, so there is still room for the sector to continue to grind tighter. Bullets near the 7-year part of curve seem to offer the most relative value given the steeper yield curve and that spreads increase to north of 40 basis points (with absolute yields approaching 1.00%). Callables tightened by a much greater degree than bullets for nearly every tenor and call structure. Basically all callable issues with 2- to 5-year maturities tightened by roughly 20 to 25 basis points last week. Given the fact that extending call lockouts out to 6 or 12 months is relatively inexpensive, combined with the massive amount of call volume that Vining Sparks customers have seen in recent months, most internal activity centered around longer lockout type issues last week.
The following table reflects last week’s total issuance and call activity across the primary GSE issuers. Total issuance increased to $8.6 billion and call volume also increased to $12.3 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.
There were no major issuance dates scheduled for last week. Farm Credit did issue a $1 billion 2-year Designated Bond that priced at +12. Freddie Mac has an upcoming issuance slot tomorrow, May 5th. Next Wednesday the Federal Home Loan Bank has an issuance slot to announce a new Global note.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP