November 6, 2017
Agency yields were pressed down along the long-end of the curve last week as investors turned their attention to news out of Washington. With tax reform gaining momentum, the FOMC meeting outcome, the Bank of England decision, the Fed Chair announcement, the Nonfarm Payrolls release, and the Mueller investigation of Trump’s presidential campaign hanging over the White House, it was difficult to find much direction either way. Two-year Agency yields increased 2 bps to 1.68%, 5-year Agency yields fell 4 bps to 2.05%, and yields on 10-year Agencies were lower by 9 bps to 2.67%.
Yield spreads for Agency bullets compared to Treasuries were unchanged with the exception of 3-year bullets, which experienced a widening of 4bps. Yield spreads on Agency callables were relatively stable on the short-end of the curve, but widened 10 to 11 bps in 10-year finals and 8 to 10 bps in 15-year finals. For investors that can handle the optionality, 10-year callables are attractive on a spread basis to bullets (see graph below).
The following table reflects last week’s total issuance and call activity across GSE issuers:
|Federal Farm Credit Banks||579,000,000||–|
|Federal Home Loan Banks||1,829,000,000||–|
|Federal Home Loan Mortgage Corp||1,625,000,000||150,000,000|
|Federal National Mortgage Association||210,000,000||15,000,000|
|Federal Agricultural Mortgage Corp||450,000||–|
The Office of Finance for the Federal Home Loan Banks has a scheduled global bond supply slot on Wednesday. Freddie Mac will have a reference note announcement on November 13th.
For investors looking to reinvest cash flows or put excess cash to work, Agency callables with 10- to 15-year finals are appealing from a relative value perspective. As seen on the table below, current spreads compare favorably to their 12-month averages and in some cases are just below 12-month highs.
Ricky Brillard, CPA
Vining Sparks, IBG