Agency Update

October 10, 2017

For the fourth consecutive week, Agency yields rose again, albeit modestly, moving in lock-step with the increase in Treasury yields.  The move higher was driven by hawkish comments from several Federal Reserve members and the September employment report that showed stronger wage growth.  On the week, two-year Agency yields increased 1 bp to 1.56%, 5-year Agency yields increased 3 bps to 2.06%, and yields on 10-year Agencies climbed by 3 bps to 2.71%.

Yield spreads for Agency bullets compared to Treasuries were largely steady.  For the fourth consecutive week, the value of call options declined as yield spreads on Agency callables tightened 1 to 5bps, depending on the structure and call tenor.  Agency debt spreads have been trending tighter over the past month, led by the 5year, and that might continue amid the impact of Treasury supply during the week ahead.  Callable Agency spreads versus bullets were relatively stable for the short-end and contracted 1 to 5 bps in the 5- and 10-year maturities.

The following table reflects last week’s tightening of funding levels across GSE issuers:


Issuer Issued Called
Federal Farm Credit Banks      342,000,000                       20,000,000
Federal Home Loan Banks      805,000,000                     525,000,000
Federal Home Loan Mortgage Corp      125,000,000                     500,000,000
Federal National Mortgage Association        15,000,000                     100,000,000
Federal Agricultural Mortgage Corp                       –
Total   1,287,000,000                  1,145,000,000


On Thursday, Fannie Mae announced that it priced its new 2% five-year benchmark note due on October 5, 2022.  This was Fannie Mae’s third new 5-year benchmark note this year.  The Office of Finance for the Federal Home Loan Banks has a scheduled global bond supply slot on Wednesday.  FHLB priced a $3 billion 3-year on September 7th, which was its first new issue since May and its only 3-year year-to-date.  Fannie Mae will have a benchmark note announcement on October 17th and Federal Home Loan Bank will have a global bond announcement on October 19th.

Speaking last week at a congressional hearing, FHFA Director Mel Watt expressed discomfort that the 9-year federal conservatorship of the GSEs is nowhere near being solved.  Watt told the committee that it would be “irresponsible” for Fannie Mae and Freddie Mac to not be allowed to rebuild their capital buffers.  He stated it was the role of Congress, not FHFA, to make tough decisions that chart the path out of conservatorship and to the future housing finance system.

Last week, Agency activity was focused on the 3- to 5-year part of the curve, specifically the 3-year bullet issue and the 3.75YR NC 6-month.  The steepness on the front end of the curve has been beneficial for extra yield and the tendency to roll down should the curve maintain its curve shape.

Ricky Brillard, CPA


Vining Sparks, IBG

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