May 6, 2019
Treasuries sold off on the week and sovereign debt yields increased by 3 to 5 basis points in the belly of the curve. The spread between 1- and 5-year Treasuries is still slightly negative but the 2s-to-10s slope has been hovering near the steeper levels of this year at approximately 20 basis points. Both agency bullets and callables mostly tightened in versus Treasuries last week. Yields for 3- and 5-year bullets increased by 3 to 4 basis points to 2.34% and 2.39%, respectively.
Spreads on bullets remain at basically the tightest levels since October; for instance, 3-year bullets are trading at approximately 4 basis points, and 5-year bullet spreads stayed flat last week at 7 basis points over Treasuries, which are both several basis points tighter than the 12-month average. As recently as year-end, those spreads were closer to 11 and 18 basis points, respectively. Callable agencies mostly tightened in last week but callables are still trading at or above their 12-month average spreads for maturities inside of 5 years. Investors can find some relative value in bullets if they can extend out past maturity dates of 5 years. In some cases, minimal extension is required—for example, October 2024 Farm Credit paper is trading at +13 basis points over Treasuries. That compares favorably to the June 2024 FHLB TAP issue at +7, so buyers can pick up nearly double the spread for only 4 months’ worth of added duration. As highlighted in the charts below, less structured 3-year paper is trading at close to multiyear highs. Spreads on less structured 5-year callables have tightened in of late but are at basically double the spreads seen in much of 2017. Another popular trade has been 14- and 15-year callables with lockout periods of 1 year at spreads close to 100 basis points.
The below table reflects last week’s total issuance and call activity across the primary GSE issuers. Last week’s call activity was flat at $1.7 billion, and the amount of agency issuance remained elevated at $4.4 billion.
Last Monday Fannie Mae passed on its Benchmark issuance slot for the 3rd time this year but did announce a $2.5 billion 18-month floating rate note that priced at SOFR +7.5. Last Thursday Freddie Mac also passed on its issuance slot and has passed on all 7 announcement dates so far this year after passing on 14 of 16 slots last year. This Tuesday is the next announcement date for the Federal Home Loan Bank to issue Global notes. Next Wednesday is the upcoming date for Freddie Mac to announce Reference note issuance.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP