November 18, 2019
Last week the market gave back roughly half of the yields picked up the week before, with much of the trade action appearing to relate to renewed trade uncertainty with China. Yields declined by 7 to 11 basis points for Treasurys with 2- to 10-year maturities, and bullets largely moved in line with Treasurys. In hindsight, the market appears to be sending strong buy signals: since the end of July, the 5-year Treasury has closed at or above 1.70% on only 6 trading days, and on only 5 days has the 10-year closed at or above 1.90%. Vining Sparks’s customers have been active in the broader bond universe in taking advantage of these brief buying opportunities (at least brief over the short term) by deploying excess liquidity. Bonds are rallying modestly again this morning, with yields down roughly 2-3 basis points across the curve, but with the 5-year at 1.62% and the 10-year at 1.80%, current yields are still near the recent highs.
Last week, agency bullets largely moved in line with Treasurys, while callables continued to tighten versus sovereign debt. Bullet spreads have not moved much in recent weeks and bullets are still trading at roughly the tightest spreads since May of this year. Agency callables appear to be particularly rich from a relative-value standpoint and are now trading at the tightest spreads since May 2018. For instance, 5-year Treasury yields are up more than 10 basis points from 2 weeks ago, but given the spread tightening, less structured 5-year callables with 3-month lockouts are trading just below the absolute yields from 2 weeks ago. The same can be found for most callables regardless of tenor or structure.
The below table reflects last week’s total issuance and call activity across the primary GSE issuers. Call volume remains high and totaled more than $9 billion last week, and holders of callable paper can likely continue to expect elevated call volume in their higher coupon issues over the near term. For holders of callable paper, do not forget to review projected call volume on the Client Portal on the Vining Sparks website.
Last Wednesday Fannie Mae passed on its Benchmark issuance slot, and this morning Freddie Mac also passed on its Reference note slot. Freddie Mac has declined to issue Reference notes all year, and its last major issuance date was in June 2018. This week Fannie Mae has another issuance date on Wednesday. Next Monday, the Federal Home Loan Bank has an upcoming Global issuance date.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP