November 4, 2019
Well, what was billed as an eventful week in the financial markets did not disappoint. The Treasury market sold off to start the week, then rallied on Wednesday following negative U.S.-China trade news and relatively-hawkish commentary from Jay Powell post-FOMC decision, then sold off with the strong jobs report on Friday. Yields on 2- to 10-year Treasurys fell 7 to 9 basis points on the week (but are higher by 4 to 7 basis points this morning), and bullets mostly moved in line with Treasurys. As highlighted in the yield curve graph below, the yield curve is almost completely flat out to 5 years, and the slope from 2s to 10s and 5s to 10s is 18 basis points.
Last week agency bullets mostly moved in line with Treasurys, while callables resumed their recent tightening trend. Although bullet spreads were little changed on the week, most bullets are trading at the tightest spreads since May. Some callables, particularly less structured calls, are now trading at the tightest spreads in roughly 6 months but with some tenors still at 50+ basis points over Treasurys. More highly-structured callables in the intermediate portion of the curve, e.g. 5-year maturities with 1-year call dates, are trading at the tightest spreads since July but still at more than 40 basis points over Treasurys.
The below table reflects last week’s total issuance and call activity across the primary GSE issuers. Both issuance and call volume were high at $10.9 billion and $7.0 billion, respectively, and holders of callable paper can likely continue to expect elevated call volume in their higher coupon issues. As mentioned in previous Sector Updates, portfolio managers can go to the Client Portal on the Vining Sparks website to view updated cash flow projections for any callable bonds that may be rolling off soon.
There were no major issuance dates last week. This Wednesday the FHLB has its next issuance slot after declining to announce new issuance at their last announcement date in mid-October. Next Wednesday, November 13th, Fannie Mae has its next Benchmark securities issuance slot.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP