September 16, 2019
Bond yields shot significantly higher last week amidst easing trade tensions and relatively-firm economic data releases. Treasury yields ended the week up 26 to 34 basis points in the 2- to 10-year portion of the curve and are back to levels not seen since the beginning of August. Yields on 3-year bullets increased by 27 basis points to 1.82%, and 5-year bullets picked up 31 basis points on the week ending Friday at 1.83%. Additionally, while the curve remains inverted from 3-month Treasury Bills to 10-year Notes, the oft watched 2s-to-10s portion of the curve ended the trading session Friday at +0.09%. Looking ahead, all eyes will be on the Fed this week as the FOMC holds their September meeting, which concludes on Wednesday. A 25 basis point rate cut appears all but certain, and the market continues to price in 50/50 odds of another 25 basis point cut either in October or December—the chance of 75 basis points’ worth of cuts by the end of the year has fallen significantly in recent weeks.
Spreads on agency bullets and callables tightened in last week with the market selloff, and the sharpest moves again occurred on the longer-end of the curve (particularly in callables). Bullets tightened in by 1 to 2 basis points, while callables of nearly all maturities and structures tightened by double digits. For instance, callables with 5-year maturities, and with lockout periods of both 3 and 12 months, are now trading approximately 15 basis points tighter. Over the past several months, discount callables have been difficult to source, but investors can now find callables at modest discounts (generally $99.50 and higher, but discounts nonetheless).
The below table reflects last week’s total issuance and call activity across the primary GSE issuers. Despite the surge in Treasury yields last week, call volume nearly doubled to $11.5 billion, and holders of callable paper can likely continue to expect high call volume given rates remain near the lowest point since the 2016 election. 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.
The Federal Home Loan Bank declined to issue a new Global security last Wednesday but they did auction $600 million in a reopening of the 11/26/2028 Global (CUSIP 3130AFFX0), bringing its new total size up to $2.65 billion. Fannie Mae has an issuance date this Thursday, September 19th. Next week Freddie Mac has its first issuance date in more than 6 weeks.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP