November 27, 2017
The Agency yield curve continued its flattening the past week as investors turned their attention to the release of minutes from the latest FOMC meeting. The minutes from the Fed’s Oct. 31-Nov 1 meeting revealed policymakers expect rates to be raised in the “near term,” due to a strengthening economy, though several stated their support for a hike would depend on whether or not they see evidence of higher inflation. For the week, two-year Agency yields increased 3 bps to 1.80%, 5-year Agencies climbed 1 bp to 2.13%, and yields on 10-year Agencies were unchanged at 2.68%.
Yield spreads for Agency bullets and callables compared to Treasuries were unchanged for the week with the exception of 3-year bullets, which experienced a tightening of 1 bp. Compared to two weeks ago, spreads for callable Agencies tightened 2 to 4 bps with 2-year finals. On the contrary, yield spreads for callable Agencies widened 5 to 6 bps with 3-year finals and 2 to 8 bps with 5-year finals.
Callable structures with 3-year finals compare favorably to bullets because of the 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:
|Federal Farm Credit Banks||175,000,000||10,000,000|
|Federal Home Loan Banks||398,000,000||75,000,000|
|Federal Home Loan Mortgage Corp||1,515,000,000||40,000,000|
|Federal National Mortgage Association||100,000,000||–|
|Federal Agricultural Mortgage Corp||–||–|
Last week, there were no large agency bullet announcements. The highlight of the agency coupon calendar in the upcoming week will be Federal Home Loan Bank’s announcement on Wednesday of any plans to sell global bonds.
Ricky Brillard, CPA
Vining Sparks, IBG