October 26, 2020
Treasury yields moved higher in a meaningful way last week and the yield curve, as measured by the 2s-to-10s spread, steepened to its highest level since February 2018 on Thursday and ended the week just shy of 70 basis points. The 10-year yield increased by 10 basis points and ended the week at 0.84%, and the 5-year note picked up 6 basis points and closed Friday at 0.38%. The impetus behind such moves in government yields appeared to be progress on stimulus negotiations, although even if a compromise between House Democrats and the White House can be reached before next week’s election, passage of a ~$2 trillion aid package through the Republican-held Senate appears increasingly unlikely. Spreads on agency bullets tightened by approximately a basis point for maturities of 3 years and longer. Callables also largely tightened on the week, particularly on the longer end of the curve. Besides ongoing stimulus talks, this week’s calendar is rather full with more housing data releases, the Q3 GDP report comes Thursday, September PCE is scheduled for Friday, and several mega-tech names will report earnings along the way.
Agency bullets tightened by a basis point on 3-year notes and longer. Callable agencies also tightened, and to a much greater degree on the long end of the curve. Most structures out to 5-year maturities tightened by 1 or 2 basis points, while 10-year callables with 1-year lockouts tightened by 5 basis points, and less structured (shorter call lockouts) notes tightened even further. Internal activity remained brisk last week and mostly consisted of customers putting cash to work. Interestingly, the theme last week was new-issue deals coming at significant discounts. For instance, a 9-year callable with a 1-year lockout printed with about a ½ point discount. Most of the new issue deals that have come to market since the pandemic struck have come with at least 1-year lockouts. That continues to be the case, and last week’s market moves favored even longer 2-year lockout structures.
The following table reflects last week’s total issuance and call activity across the primary GSE issuers. Total issuance increased to $7.8 billion while call volume declined to $7.1 billion. Despite last week’s selloff, callable owners can continue to expect heavy call volume, and for specific dates and amounts, be sure to log in to the Client Portal on the Vining Sparks website.
Last week the Federal Home Loan Bank issued a $1 billion 2-year Global note that priced at +4, its first large issuance since August. The FHLB has another issuance slot tomorrow (Tuesday), and Freddie Mac has a Reference note issuance slot next Tuesday.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP