October 15, 2018
Last week Treasury yields declined across the curve, particularly on the longer end, with 2-year yields dipping 3 basis points and 10-year yields falling by 7 basis points. The spread between the 2-year and 10-year Notes fell from its recent highs and ended the week at 30 basis points, 5 basis points lower than the previous week. Agency bullets underperformed Treasuries. Currently 3-year agency bullets are still trading at yields near 3.00%. Yields on 5-year bullets fell 3 basis points to 3.11%.
Agency bullet spreads over Treasuries widened, especially on the intermediate part of the curve. Spreads on 5-year Agencies widened by 4 basis points and now trade at +11 to sovereign debt. Callable spreads mostly widened as well, an unsurprising move given the heightened market volatility. The least structured 3-year callables now yield 3.27% and look cheap from a relative value standpoint following the market move last week. As highlighted in the charts below, callable yields remain near the highs of the past several years and have increased significantly over the last year.
The following table reflects last week’s total issuance and call activity across GSE issuers:
Last Wednesday the Federal Home Loan Bank issued $3 billion in 3-year Global securities that priced at +8 to Treasuries. This Wednesday, October 17th, is Freddie Mac’s upcoming announcement date to issue Reference notes. Next Thursday, October 25th, is the upcoming issuance date for the Federal Home Loan Bank to issue additional Global bonds.
Senior Vice President