Agency Update

October 2, 2017

Agency yields benefited from the steepening Treasury yield curve as Janet Yellen cautioned the Fed “should be wary of moving too gradually” in a speech last week and the U.S. Administration released details for tax reform.  Both events firmed expectations for a rate hike in December and prompted a hawkish market response.  Two-year Agency yields increased by 5 bps to 1.54%, 5-year Agency yields climbed 6 bps to 2.01%, and yields on 10-year Agencies were higher by 7 bps to 2.67%.

For the second consecutive week, yield spreads for Agency bullets compared to Treasuries were unchanged, while yield spreads on Agency callables tightened 2 bps in longer-term maturities (5+ years).  In the near-term agency note spreads should remain confined to recent ranges.  Callable Agency spreads versus bullets were unchanged for the short-end and contracted 2 bps in the 5- and 10-year maturities.

The following table reflects last week’s total issuance and weaker call activity across GSE issuers:

Issuer Issued Called
Federal Farm Credit Banks      290,000,000                                      –
Federal Home Loan Banks   2,244,000,000                     285,000,000
Federal Home Loan Mortgage Corp   3,105,000,000                     645,000,000
Federal National Mortgage Association      310,000,000                     310,000,000
Federal Agricultural Mortgage Corp          7,000,000                                      –
Total   5,956,000,000                  1,240,000,000


On Thursday, Freddie Mac announced that it priced its new 1.625% three-year reference note due on September 29, 2020.  The highlight of the agency coupon calendar in the upcoming week will be Fannie Mae’s announcement on Wednesday of any plans to sell benchmark notes.  Federal Home Loan Bank will have a global bond announcement on October 11th.

Last week, investors took advantage of the Agency market within a variety of callable terms and structures, especially 3nc6mo structures.  There was also good activity in the three- through five-year part of the bullet curve where investors could get 18 to 20 bp higher yields than two weeks ago.

Ricky Brillard, CPA


Vining Sparks, IBG

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