Agency Update

October 15, 2019

After several weeks of declines in Treasury yields, bond investors saw a meaningful selloff last week following positive trade news with China and progress on Brexit negotiations.  Treasury yields for notes with 2- to 10-year maturities increased 19 to 21 basis points on the week, and bullets tightened in versus sovereign debt.  The 2s-to-10s portion of the curve ended Friday at +13 basis points, basically back at its steepest slope since the beginning of August.

Agency bullets with maturities of 2 to 3 years tightened by a basis point last week and bullets with maturities between 5 and 10 years tightened by 2 basis points.  This author would call bullets in the belly of the curve relatively rich right now, as spreads on 3- and 5-year paper have fallen to the tightest levels since May.  Callables tightened in more significantly with last week’s selloff, with some tenors tightening by double-digit basis points.  For agency investors looking for yield in the intermediate portion of the curve, 5-year bullets are trading near 1.62% while more structured callables with similar maturities are trading near 1.90%.  If bullet investors can extend out to ~6.5-year maturities, they can reach yields of a more palatable 1.75%.  Right now, yields of 2.0% or greater for maturities inside of 10 years can only be found with callables.

The below table reflects last week’s total issuance and call activity across the primary GSE issuers.  Call volume nearly tripled last week to $6.9 billion, 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.

Last week Freddie Mac passed on its next issuance slot as it has all year.  Fannie Mae has an announcement date for Benchmark securities this Wednesday the 16th.  The Federal Home Loan Bank has a Global note issuance date next Wednesday.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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