November 25, 2019
Treasurys were up and down last week, largely moving on back-and-forth trade news, and yields ended the trading session on Friday 2-6 basis points lower for maturities of 5 years and longer. The yield curve also continued its recent flattening trend, and the slope between 2- and 10-year Treasurys fell to the lowest level in more than a month. Agency bullet spreads were mostly unchanged on the week.
While agency bullets largely moved in line with Treasurys, callables widened modestly after tightening for much of the previous month. Bullets continue to trade near the tightest spreads since early summer. In general, agency callables still appear to be relatively rich given that spreads have not increased meaningfully from two weeks ago when they were trading at the tightest levels in more than a year. However, investors can still find some relative value in the market. Vining’s depository investors have increasingly sought 1-year lockout paper and 2.0% yields or better. Right now, some callable issues at certain points along the curve can offer particularly attractive yields. For instance, if the portfolio can assume somewhat longer duration, 8-year maturities with 1-year lockouts look appealing. See below for coupons on recent 1-year lockout new issues; the 8-year maturity picks up 25 basis points versus 7-year paper, and is only 7 basis points below the 9-year maturity and 12 basis points below the 10-year final.
The below table reflects last week’s total issuance and call activity across the primary GSE issuers. Call volume totaled more than $10 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 Monday Freddie Mac passed on its Reference note slot, just as it has all year. Fannie Mae also declined to announce new Reference note issuance last Wednesday. Today the Federal Home Loan Bank pass on its Global issuance slot, with another coming next Monday, December 2nd. Fannie Mae also has another issuance date next Wednesday.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP