September 11, 2017
A flight to quality sent Agency yields lower across the curve, with the most movement occurring in longer-term maturities. The “risk off” attitude last week was driven by news from North Korea, U.S. debt ceiling discussions, a possible government shutdown, and Hurricane Irma. Two-year Agency yields moved lower by 6bps to 1.35%, 5-year Agency yields fell 9bps to 1.74%, and yields on 10-year Agencies decreased 11bps to 2.41%.
Yield spreads for Agency bullets compared to Treasuries widened 1bp, while yield spreads on Agency callables widened 2 to 6bps, depending on the structure and call tenor. This was the first change in spreads between Agency bullets and callables to Treasuries in six weeks. Callable Agency spreads versus bullets were relatively stable with the exception of callable Agencies with 10-year finals, which widened 6bps.
In the near-term, expect agency spreads to trade near current levels. Five-year note spreads have cheapened in recent weeks to what seem like more sustainable levels.
The agency market last week featured strong redemptions and net negative issuance, an expected outcome. The following table reflects last week’s total issuance and call activity across GSE issuers:
|Federal Farm Credit Banks||630,000,000||612,567,000|
|Federal Home Loan Banks||145,000,000||551,000,000|
|Federal Home Loan Mortgage Corp||1,035,000,000|
|Federal National Mortgage Association||–||45,000,000|
|Federal Agricultural Mortgage Corp||7,000,000||–|
On Thursday, Federal Home Loan Bank launched its new $3 billion three-year global bonds priced at +10bps to Treasuries. The highlight of the agency coupon calendar in the week ahead will be Fannie Mae’s announcement on Tuesday of any plans to sell benchmark notes and Freddie Mac’s announcement on Thursday of any plans to sell reference notes. Freddie Mac will have a reference note announcement on September 27th.
Last week, activity was focused on swaps with accounts coming out the front end and extending out the curve to the 5- to 7-year sector. Inventory consists of bullets on the front end that are cheap to market, new callable positions with cushion items on the front end, and discounted issues in the five-and-a-half-year part of the curve.
Ricky Brillard, CPA
Vining Sparks, IBG