September 23, 2019
After the significant Treasury market backup over the previous two weeks, sovereign debt rallied last week and yields fell by double digits for maturities of two years and longer. Yields on 2-year bullets declined by 11 basis points to 1.73%, while 3- and 5-year bullet yields fell by 14-15 basis points and ended the trading session Friday at 1.68% apiece. At the September FOMC meeting that concluded on Wednesday the Fed cut the overnight target rate by 25 basis points as expected, but much of the move in rates appeared to be related more to liquidity pressures and reports of possible U.S.-China trade negotiation breakdowns.
Spreads on agency bullets were basically unchanged last week while callables widened out after tightening over previous weeks. Bullets continue to trade near their multiyear average spreads while callables remain on the wide end of the recent trading range (with some structures trading basically at the widest levels in a decade). As mentioned last week, investors can still find callables at slight discounts, but with the market rally last week any meaningful discount paper moved closer to (or above) par.
The below table reflects last week’s total issuance and call activity across the primary GSE issuers. Call volume declined to nearly $7.5 billion, and holders of callable paper can likely continue to expect elevated call volume in their higher coupon issues. 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.
Fannie Mae passed on their issuance date last Thursday for the 9th time this year. Tomorrow, September 24th, Freddie Mac has its first issuance date in more than 6 weeks. Next Wednesday the Federal Home Loan Bank has its next global issuance slot.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP