May 7, 2018
Agency yields were mixed on the week, with modest increases on shorter-term maturities and small declines for longer-term maturities, resulting in a slightly flatter curve. For the week, two-year Agency yields moved higher by 2 bp to 2.55%, the 5-year Agency yield declined 2 bps to 2.86%, and yields on 10-year Agencies fell 2 bps to 3.24%.
Yield spreads for Agency bullets compared to Treasuries were unchanged, while yield spreads on callables to Treasuries were mixed. Spreads tightened 1 bp for 3-year finals and widened 4 bps for 5-year finals. Callable structures with 5-year finals, compare favorably to bullets because of 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:
The highlight of the agency large bullet calendar in the week ahead will be FHLB’s announcement on Wednesday of any plans to sell global bonds.
Notable agency activity last week included:
In general, deep discounted callables are very appealing with healthy discounts at 30 to 40 basis points over bullets with similar OAS spreads on par coupons. With bullets trading tight and secondary callables with slight give to maturity versus par coupons, consider focusing on this paper.
Ricky Brillard, CPA
Vining Sparks, IBG