October 16, 2017
The curve flattened on the week with yields on Agencies moving slightly higher on the short-end of the curve, and declining for maturities 5 years and longer. The flattening curve was the result of robust demand for the 30-year Treasury auction, as investors stayed skeptical about tax reform and inflation. Two-year Agency yields moved higher by 2 bps to 1.58%, the 5-year Agency yield decreased 5 bps to 2%, and the yield on the 10-year Agency fell 8 bps to 2.62%.
Yield spreads for Agency bullets compared to Treasuries widened 1 to 2 bps in the belly of the curve (3- to 5-year finals). Yield spreads on Agency callables were relatively stable on the short-end of the curve, but widened 5 to 9 bps in 5- to 15-year finals. In the near-term, expect agency note spreads to move sideways. Callable Agency spreads versus bullets tightened 2 bps in the 2- to 3-year part of the curve, but widened 4 and 8 bps in the 5- and 10-year finals, respectively.
The following table reflects last week’s total issuance and call activity across GSE issuers:
|Federal Farm Credit Banks||210,000,000||–|
|Federal Home Loan Banks||256,000,000||150,000,000|
|Federal Home Loan Mortgage Corp||180,000,000||230,000,000|
|Federal National Mortgage Association||550,000,000||50,000,000|
|Federal Agricultural Mortgage Corp||9,000,000||–|
On Thursday, Federal Home Loan Bank launched its new $3 billion two-year global bonds due on October 21, 2019. The highlight of the agency coupon calendar in the upcoming week will be Fannie Mae’s announcement on Tuesday of any plans to sell benchmark notes and FHLB’s announcement on Thursday of any plans to sell global bonds. Both GSEs sold issues recently, so it would not be surprising to see them both pass this week.
Relative value can be found in the 2 and 3-year part of the curve as yields for these callable structures exceed their 12-month averages. These structures are highlighted below:
- 2YR NC 3MO – current yield of 1.69% compared to 12-month average of 1.41%
- 2YR NC 6MO – current yield of 1.64% compared to 12-month average of 1.39%
- 2YR NC 1YR – current yield of 1.59% compared to 12-month average of 1.37%
- 3YR NC 3MO – current yield of 1.89% compared to 12-month average of 1.69%
- 3YR NC 6MO – current yield of 1.84% compared to 12-month average of 1.66%
- 3YR NC 1YR – current yield of 1.80% compared to 12-month average of 1.63%
Ricky Brillard, CPA
Vining Sparks, IBG