September 18, 2017
Agency yields benefited from the 5-, 10-, and 30-year year Treasury rates jumping higher last week with “risk on” sentiment abounding. The “risk off” attitude subsided with the downsizing of economic costs related to Hurricane Irma’s destruction and the lack of news out of North Korea. Two-year Agency yields increased 10 bps to 1.44%, 5-year Agencies climbed by 2 bps to 1.90%, and yields on 10-year Agencies rose 15 bps to 2.55%.
Yield spreads for Agency bullets compared to Treasuries contracted by 1 to 2 bps, while yield spreads on Agency callables tightened 2 to 3 bps, depending on the structure and call tenor. In the near-term, expect agency note spreads to be confined to recent ranges. Callable Agency spreads versus bullets widened 1 to 2 bps in the shorter-term structures, but tightened 1 to 3 bps in the longer-term maturities.
The following table reflects last week’s total issuance and call activity across GSE issuers:
|Federal Farm Credit Banks||1,214,000,000||50,000,000|
|Federal Home Loan Banks||733,000,000||379,000,000|
|Federal Home Loan Mortgage Corp||275,000,000||405,000,000|
|Federal National Mortgage Association||–||285,000,000|
|Federal Agricultural Mortgage Corp||–||–|
GSE shares moved sharply higher on Thursday afternoon after six Senate Democrats called on the FHFA and Treasury to let Fannie Mae and Freddie Mac begin to build capital. The senators wrote to ask that the officials consider allowing Fannie Mae and Freddie Mac to retain some of their earnings as a buffer against future losses, while leaving the door open for allowing the GSEs to exit conservatorship. Treasury Secretary, Steve Mnuchin, responded saying plans for overhauling the GSEs won’t be addressed until next year, adding that he expects the companies to continue turning over their profits to the government.
On Tuesday, Fannie Mae skipped its benchmark note issuance slot. It has passed 11 times year-to-date versus just 4 times in 2016. Freddie Mac forewent issuing reference notes on its September 14th announcement date. It has passed 8 slots year-to-date versus 10 times in 2016. There are no large agency bullet issues scheduled for announcement in the upcoming week. Freddie Mac will have a reference note announcement on September 27th.
During the past week, we have observed continued demand for the following structures:
- Agency callables with 4- to 5-year finals
- European call new issues
- Bullets offered at favorable levels
Ricky Brillard, CPA
Vining Sparks, IBG