Agency Update

September 24, 2018

The Treasury market sold off last week and reversed the recent flattening trend, with the spread between 2-year and 10-year Treasuries ending the week with the widest margin of the past month at 26 basis points.  The 5-year Treasury reached the highest yield of this rate cycle at 2.95%, and the 10-year ended the week at 3.06%, the highest level since mid-May.  Agency bullet yields moved in line with Treasuries.  Yields for 2-year bullets are trading at 2.86%, 3-year bullet yields increased to 2.96%, and 5-year bullets now yield 3.03%.

Yield spreads for Agency bullets compared to Treasures were unchanged, while callable spreads tightened for a fourth consecutive week.  Spreads for callable Agencies tightened by 1 to 3 basis points across the curve.  All callables regardless of term or structure appear to be trading at the highest yields of this rate cycle.  Yields for more highly-structured 3- and 5-year callables have increased above 3.00% and 3.25%, respectively.  Yields on 3-year callables with onetime calls in 1 year have increased to 3.04%, and 5-year callables with onetime calls in 2 years have increased to 3.27%. As seen in the charts below, callable yields for 3- and 5-year agency product continued to tick higher and, despite callable spreads tightening in recent weeks, seem to be at appealing absolute levels.

Last Thursday, September 20th, the Federal Home Loan Bank passed on its Global issuance slot.  That was the 9th instance of 13 issuance dates so far this year.  This week Freddie Mac has an issuance date on September 27th.  Next week Fannie Mae has its next issuance date on October 2nd.

Daniel Anderson

Senior Vice President

Vining Sparks

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