September 25, 2017
For the second consecutive week, Agency yields experienced a modest improvement last week. Two-year Agency yields increased by 5 bps to 1.49%, 5-year Agency yields climbed 5 bps to 1.95%, and yields on 10-year Agencies were higher by 5 bps to 2.60%.
Yield spreads for Agency bullets compared to Treasuries were unchanged, while yield spreads on Agency callables tightened 1 to 3 bps, depending on the structure and call tenor. In the near-term, expect agency note spreads to be confined to recent ranges although there might be some near-term tightening of spreads on the roll to new Treasury issues. For investors that can handle the duration, spreads on callable Agencies with 10-year finals are above their 12-month averages. Callable Agency spreads versus bullets tightened 1 to 3 bps across all structures.
The following table reflects last week’s total issuance and call activity across GSE issuers:
|Federal Farm Credit Banks||259,000,000||–|
|Federal Home Loan Banks||420,000,000||420,000,000|
|Federal Home Loan Mortgage Corp||605,000,000||1,305,000,000|
|Federal National Mortgage Association||–||100,000,000|
|Federal Agricultural Mortgage Corp||30,000,000||–|
The highlight of the agency coupon calendar in the upcoming week will be Freddie Mac’s announcement on Wednesday of any plans to sell reference notes. It has passed its last 3 slots after pricing a $3 billion 2-year bullet on July 18th. Fannie Mae will have a benchmark note announcement on October 4th.
Last week, activity was heavily focused on customers buying in the 3 to 5-year finals. Good value can be found in odd lot off-the-run bullet paper, which is trading 5 to 15 bps wide to on-the-run benchmarks. Also, opportunities for extra yield exist out on the curve with the 6, 7, and 10-year auction paper.
Ricky Brillard, CPA
Vining Sparks, IBG