October 7, 2019
Treasury yields continued their steady march downwards last week. Sovereign debt yields ended the week down significantly and back close to the lows from early September. Much of the move was the result of much weaker than expected ISM manufacturing and non-manufacturing data releases, and there is a growing concern that the domestic is economy is headed towards recession. According to Fed funds futures, the market is pricing in odds of an overnight rate cut in December at nearly 90%. Delegates from China are set to resume trade talks with U.S. negotiators later this week—should a trade deal get done, there is a good chance of a broader bond market selloff, but the chance of a breakthrough on negotiations seems slim at this point.
Agency bullets with maturities of 2 to 3 years tightened by a basis point last week while callable spreads mostly widened with the rally. Spreads on 3-year bullets have tightened from 10 basis points in early July to approximately half of that as of last week, while 5-year bullets have tightened to a lesser degree (~12 basis points in July versus 9 basis points today).
The below table reflects last week’s total issuance and call activity across the primary GSE issuers. Call volume nearly tripled last week to $6.9 billion, and holders of callable paper can likely continue to expect elevated call volume in their higher coupon issues. 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 passed on its Global issuance slot. Freddie Mac has its next issuance date this Thursday, October 10th, but has passed on all issuance slots so far this year. Fannie Mae’s next announcement date for Benchmark securities is next Wednesday the 16th.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP