Agency Update

October 25, 2021

The selloff in Treasurys continued last week, with bond yields increasing by 6 to 7 basis points for 2- to 10-year Treasurys.  Since bottoming out in early August, 5- and 10-year Treasury yields have increased by approximately 50 basis points—a considerable move in a relatively short time.  Market participants seem to be keenly focused on persistent supply chain bottlenecks and, relatedly, rising inflation.  For what it is worth, the Vining Sparks economists’ base case that inflation will moderate over the next several quarters, despite the fact that supply chain and labor imbalances will likely persist into 2022.  Agency bullet spreads were basically unchanged last week while callable spreads came in a bit on the longer end of the curve.  The calendar this week is very data-heavy, with regional Fed reports, consumer confidence, and the latest PCE inflation reading.  The 3rd quarter initial GDP estimate also comes out on Thursday.  Many economists have been revising their GDP estimates lower, and the latest GDPNow estimate came in at 0.5% for the 3rd quarter.

Agency bullet spreads were unchanged on the week and remain near all-time lows.  Callable spreads were mostly unchanged, but 15-year tenors tightened by a couple of basis points.  As can be seen in the charts below, even spreads on well-structured agency callables out to 5 years have sunk to single digit basis points—not much compensation for investors to assume that call risk.  Trade activity remains brisk as depositories continue to invest excess liquidity.  The Vining Sparks government/agency trade desk continues to move an above-average amount of Treasurys in lieu of agencies given such tight spreads.  In fact, more than half of all client purchase activity last week were in Treasurys.

The following table reflects last week’s total issuance and call activity across the primary GSE issuers.  Total issuance was basically unchanged at $3.2 billion while call volume continues to slow, totaling only $340 million last week.  For specific call dates and amounts for individual bond portfolios, be sure to log in to the Client Portal on the Vining Sparks website.

Fannie Mae passed on its Benchmark slot last Wednesday.   Freddie Mac has its only Reference note announcement date of the month this Wednesday, October 27th, and is expected to continue to pass just as it has much of the past year.   There are no major issuance slots scheduled for next week.  The Federal Home Loan Bank has a Global issuance date scheduled for November 9th.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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