November 1, 2021
The yield curve moved in a flattening manner last week as the market continues to price in the likelihood of Fed rate hikes in 2022, perhaps a bit sooner than many had anticipated not long ago. Look no further than the 2-year Treasury yield, which increased by 4 basis points to 0.50%, its highest level since the pandemic began (and traded as high as 0.56% intraweek). The bellwether 10-year note remains rangebound just above 1.50% but moved lower by 8 basis points to 1.55%, while the Long Bond yield declined by 14 basis points to 1.93%. Interestingly, the 20- to 30-year portion of the curve is now inverted—funny things happen when the Fed begins “talking about” withdrawing historic pandemic-related monetary support. Moving forward, portfolio managers can anticipate a somewhat coordinated monetary tightening among the world’s major central banks, which the global economy can likely withstand. The 10-year German bund is even flirting with positive territory for the first time in ~2.5 years.
Agency bullet spreads are little changed over the last couple of months and remain essentially at all-time lows. Callables widened on the week (further details below). The November FOMC meeting concludes this Wednesday—no changes to monetary policy are expected but the Fed could possibly give further clarity on its taper timeline, particularly during Chair Powell’s press conference that follows the meeting. Another potential market-mover this week is whether Congress can pass the bipartisan infrastructure bill and/or President Biden’s (pared back) $1.75 trillion Build Back Better proposal. To finish the week, the October jobs report will be released this Friday, with the market anticipating a bit of a recovery following the disappointing September payrolls data.
Agency bullet spreads were unchanged on the week and remain near all-time lows. Bullets still trade at negligible spreads out to the ~5-year portion of the curve. Callables widened last week by 2-3 basis points for most 2- to 10-year structures, while 15-year terms widened by approximately 6 basis points. The charts below illustrate the combination of higher Treasury yields plus the recent spread widening. It should be noted that, despite spreads moving higher recently, callable spreads remain near post-pandemic lows. Trade activity remains brisk as depositories continue to invest excess liquidity. The Vining Sparks government/agency trade desk continues to move an above-average amount of Treasurys in lieu of agencies given such tight spreads on bullets.
The following table reflects last week’s total issuance and call activity across the primary GSE issuers. Total issuance more than doubled to $7.7 billion while call volume continues to slow, totaling only $123 million last week. For specific call dates and amounts for individual bond portfolios, be sure to log in to the Client Portal on the Vining Sparks website.
As expected, Freddie Mac passed on its Reference slot last week. There are no major issuance slots scheduled for this week. The Federal Home Loan Bank has a Global issuance date scheduled for next Tuesday, November 9th.
Senior Vice President, Investment Strategies