Agency Update

October 28, 2019

Bond yields continued to move higher last week, largely on renewed trade optimism on Friday.  Treasury yields for notes with 2- to 10-year maturities increased 4 to 6 basis points on the week, and bullets largely moved in lockstep with Treasurys.  The 2s-to-10s portion of the curve ended Friday unchanged at +18 basis points, and the majority of the yield curve has now “uninverted.”  While 2s-to-10s is likely the most closely watched term spread among investors, the market closed with that portion of the curve inverted in only 8 trading sessions starting in late August.  The 3-month to 10-year spread, another popular measure as a forward-looking recession predictor, remained inverted for much longer:  from late May to mid-October.  With both measures now in positive territory, jitters over a forthcoming recession appear to have eased somewhat.

Agency bullets mostly moved in line with Treasurys, while callables largely tightened on the week.  The more significant tightening in callables appeared to be in 3-year maturities with 3-month lockouts.  As highlighted in the graph below, all 5-year callable paper has tightened in from the recent wide marks from the beginning of the month, but 5-year callables with 1-year lockouts appear to be the most attractive given the mix of yield and optionality.

The below table reflects last week’s total issuance and call activity across the primary GSE issuers.  Call volume was high at $6.6 billion, and holders of callable paper can likely continue to expect elevated call volume in their higher coupon issues (with a bit of a slower week this week).  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 the Federal Home Loan Bank declined to issue Global securities on their issuance date.  There are no major issuance dates this week, and next Wednesday the FHLB has another issuance slot.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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