November 15, 2021
Inflation was the key topic last week following the latest CPI release, which showed the hottest inflation in 30 years amid widespread price pressures. Treasury yields increased across the curve on the expectation that the Fed will likely be forced to begin raising rates next summer, right after their just-confirmed taper timeline is set to conclude by June. One must wonder, though, whether rate hikes would be all that effective at curbing inflation given that supply chain disruptions are a main culprit for many of the price increases seen today. Turning to bond yields, the belly of the curve saw the biggest lift last week as yields on 3- and 5-year notes increased by 17 to 19 basis points, while the 10-year yield increased 11 basis points to 1.56%.
Agency bullet spreads have moved very little in recent months and remain basically at all-time lows. Callable spreads were little changed on the front end of the curve but longer maturities widened out versus Treasurys (further details below). The biggest economic release of this week will come tomorrow (Tuesday) with the October retail sales numbers, which are expected to remain firm. With the Thanksgiving holiday next week, this is the last full week for bond portfolio managers to position their portfolios ahead of the final month of the year.
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 were mostly unchanged on the front end of the curve, with only 5-year terms trading wider by a basis point. The biggest moves came in the 15-year portion of the curve, which saw widening of approximately 9 basis points. Trade activity remains robust as depositories continue to invest excess liquidity. With the increase in curvature of the yield curve last week, it is no surprise that the most purchase activity last week occurred in the 3- to 5-year part of the curve.
The following table reflects last week’s total issuance and call activity across the primary GSE issuers. Total issuance fell to $1.6 billion and call volume remained low at only $105 million last week. Call activity could pick back up if bond yields stay relatively depressed. For specific call dates and amounts for individual bond portfolios, be sure to log in to the Client Portal on the Vining Sparks website.
Last week the Federal Home Loan Bank announced a $1 billion 2-year Global note that printed at +3. Freddie Mac passed on its issuance slot today (Monday). Fannie Mae has a Benchmark issuance slot this Thursday, November 18th. The Federal Home Loan Bank has another issuance date scheduled for next Monday, November 22nd.
Senior Vice President, Investment Strategies