Agency Update

September 20, 2021

Bond yields moved higher last week amid mixed economic data.  The 10-year yield finished the Friday session at 1.36%, up 2 basis points to its highest weekly closing level since early July.  The 5-year yield also closed the week up 4 basis points to 0.86%.  Despite recent weakness in equities, it seemed as if the market tone was shifting back to risk-on, but stocks are down sharply so far this morning and bond yields have given up much of the gains found last week.  In addition to continued pandemic-fueled weakness, there are concerns that adverse events from China real estate giant Evergrande will spread to the U.S.  Agency bullet spreads were little changed last week while callables tightened.  Turning to this week, the FOMC will conclude their September meeting this Wednesday.  Remember that multiple Fed officials had discussed the desire to begin the taper process before year-end, and that still appears to be the most likely outcome.  Even this morning New York Fed President William Dudley said on Bloomberg Television that the FOMC is “not going to react to small market moves and defer the tapering on that basis. They have to change their economic forecast.  At this point it’s really premature to reach that conclusion.”

Agency bullet spreads were unchanged on the week and remain near all-time lows.  Spreads on 10-year notes remain at approximately 10 basis points, while bullets out to 5-year maturities continue to trade essentially flat to Treasurys.  Callable spreads were mixed last week, with front-end tenors tightening 1-2 basis points while 10- and 15-year maturities tightened by 3-4 basis points.  As can be seen in the charts below, 3-year callables with 1-year lockouts have been trading near 50 basis points since the end of the first quarter.  Yields on similarly structured 5-year notes also continue to trade near 1.00%.  Trade activity was quite brisk last week with an outsized number of purchases in 4- to 8-year Treasurys.  That should come as no surprise given that Treasury yields moved towards the top end of the recent trading range last week, which has been a good buy signal most of the year.

The following table reflects last week’s total issuance and call activity across the primary GSE issuers.  Total issuance increased to $5.5 billion and call volume increased to $3.0 billion.  For specific call dates and amounts for individual bond portfolios, be sure to log in to the Client Portal on the Vining Sparks website.

Last week Freddie Mac passed on its Reference note issuance slot but has another issuance date tomorrow, September 21st.  Freddie Mac has not issued a Reference note since December 2020.  Fannie Mae has an upcoming issuance date next Tuesday, September 28th.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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