Agency Update

October 9, 2018

Treasury yields spiked last week, particularly on the long end of the curve, and the selloff pushed the yield curve to its steepest level since late June.  The yield on the 2-year Note finished the week 7 basis points higher, the 5-year yield increased 12 basis points, and the 10-year added 17 basis points.  On Friday the spread between the 2-year and 10-year Notes equaled 34 basis points, matching the average of the past 6 months and topping the late-August lows by 16 basis points.  Agency bullets moved in line with Treasuries.  For the first time since late 2008 3-year agency bullets are trading at yields above 3.00% and ended the week at 3.03%.  Yields on 5-year bullets reached 3.14%.

Agency bullet spreads to Treasures were unchanged despite the selloff.  Callables reverted to the tightening trend from September after widening the previous week.  Unsurprisingly, all callable yields regardless of term or structure hit the highs of this rate cycle following the market selloff.  The least structured 3-year callables now yield 3.23%, and less-structured 5-year callables are trading at 3.53%.  On Friday a 5-year callable with a onetime call in 2 years printed with a 3.30% coupon.  As highlighted in the charts below, callable spreads have tightened in versus Treasuries over the past month, but absolute yields continue to tick higher.

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

Last Tuesday Fannie Mae passed on its Benchmark issuance slot for the 11th time in 15 issuance dates this year.  This Wednesday, October 10th, is the next slot for the Federal Home Loan Bank to issue Global securities.  Next Wednesday is Freddie Mac’s upcoming announcement date to issue Reference notes.

Daniel Anderson

Senior Vice President

Vining Sparks

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