Agency Update

November 8, 2021

The FOMC concluded its November meeting last Wednesday and, as expected, they announced that they will begin to taper asset purchases this month, with the plan to conclude the taper process by mid-2022.  While the committee and Chair Powell wisely included language that will give them the flexibility to change course as warranted by economic conditions, the goal is to finish the taper process before any rate hikes take place, which could happen as early as next summer.  Written in this space last week: “portfolio managers can anticipate a somewhat coordinated monetary tightening among the world’s major central banks, which the global economy can likely withstand.”  Apparently, the Bank of England missed the memo last week and declined to raise rates by the 15 basis points that was widely expected.  Despite the Fed beginning to step back from their ultra-accommodative monetary policy stance, the surprise no-hike from the BOE helped push U.S. Treasury yields meaningfully lower.  Yields on 2- and 3-year notes fell by 10 basis points while the 5-year declined by 13 basis points to 1.05%, a level not seen in 3 weeks.  The 10-year likewise fell to 1.45%, its lowest level since late September and the first time it has dipped below 1.50% in a month.  Even the jobs report on Friday that handily beat expectations was not enough to prevent yields from pushing lower.

Agency bullet spreads are little changed over the last couple of months and remain essentially at all-time lows.  Callables again widened on the week (further details below).  The calendar this week is a bit lighter than the last couple and features multiple Fed speakers scheduled early this week, followed by producer and consumer inflation reports over the coming days.  Market consensus is that inflation continues to heat up.  Supply chain glitches will likely have to get resolved before inflation pushes back down toward the Fed’s 2.00% target.

Agency bullet spreads were unchanged on the week and remain near all-time lows.  Bullets still trade at negligible spreads out to the ~5-year portion of the curve.  Callables widened last week by 1-2 basis points out to ~5-year maturities, while tenors further out the curve widened by approximately 5 basis points.  Trade activity remains brisk as depositories continue to invest excess liquidity.  The Vining Sparks government/agency trade desk continues to move an above-average amount of Treasurys in lieu of agencies given such tight spreads on bullets.

The following table reflects last week’s total issuance and call activity across the primary GSE issuers.  Total issuance fell to $2.9 billion and call volume remained low at only $367 million last week.  Call activity could pick back up if bond yields stay relatively depressed.  For specific call dates and amounts for individual bond portfolios, be sure to log in to the Client Portal on the Vining Sparks website.

There were no major issuance slots scheduled last week.  This week the Federal Home Loan Bank has a Global issuance slot scheduled for tomorrow (Tuesday), November 9th.  Freddie Mac has an issuance slot slated for next Monday, November 15th, after passing the week before last (just as it has for much of the past year).  Fannie Mae has a Benchmark issuance slot next Thursday, November 18th.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks

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