Agency Update

September 4, 2018

The Treasury yield curve steepened modestly last week with spreads between 2-year and 10-year maturities widening to 23 basis points.  Agency yields moved largely in line with Treasuries, with front-end bullets cheapening by 1-2 basis points in the 2- to 5-year part of the curve.  Yields for 2-year bullets are trading at 2.69%, and 5-year bullet yields moved to 2.82%.  Bullets on the longer end of the curve cheapened by 5 basis points for 10-year maturities and are now trading at 3.21%.  For the most part, investors must extend past 5-year maturities in order to pick up double-digit spreads on agency bullets.

Yield spreads for Agency bullets compared to Treasures were unchanged, while callable spreads tightened in marginally for longer maturities.  Spreads for callable Agencies tightened 1 to 2 bps for 5- and 10-year finals, but for the most part both yields and spreads have been relatively range-bound over the past several weeks across all maturities.  Less-structured 3-year callables increased 2 basis points to 3.00%, and similarly structured 5-year callables are trading at 3.30%.

From a relative value standpoint, bullets on the front end of the curve still appear to be rather rich, and given the flatness of the yield curve it is difficult to find increased yield by extending duration.  The spread on bullets from 2-year to 5-year maturities has tightened to 13 basis points, roughly one third of the spread from 6 months ago at 0.43%.  For investors willing and able to assume the optionality, callable product still looks relatively cheap.  For example, bond buyers can find 3.00% callable product in the 3-year part of the curve, but must extend out to approximately 7-year maturities to reach a 3.00% yield for bullet structures.  From an absolute spread standpoint, 10-year bullet spreads have not changed over the past month and remain at +35 to Treasuries, compared to front-end spreads at 6 to 8 basis points for maturities between 2 and 5 years.

The following table reflects last week’s total issuance and call activity across GSE issuers:

Last week, the Federal Home Loan Bank passed on its issuance slot on August 29th.  That marked the 8th instance out of the past 11 dates on which it has passed this year.  The Federal Home Loan Bank has another Global bond announcement date this Wednesday, September 5th.  Next week Fannie Mae will announce on September 11th any plans to issue Benchmark securities, and Freddie Mac has an issuance slot on September 13th.

Daniel Anderson

Senior Vice President

Vining Sparks

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