Agency Update

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:

 

Issuer Issued Called
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                                           –
Total                                           782,000,000                       2,243,567,000

 

 

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

Strategist

Vining Sparks, IBG

INTENDED FOR INSTITUTIONAL INVESTORS ONLY.
The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
Copyright © 2021
Member FINRA/SIPC
This is a publication of Vining-Sparks IBG, L.P.
775 Ridge Lake Blvd., Memphis, TN 38120