September 5, 2017
Agency yields were mixed but very stable last week. For the week, two-year Agency yields were unchanged at 1.41%, the 5-year Agency yield fell 2bps to 1.83%, and yields on 10-year Agencies held firm at 2.52%.
For the fifth consecutive week, yield spreads for Agency bullets compared to Treasuries continued to be quite stable and remain tight on a historical basis due to low supply. Yield spreads for callable Agencies were unchanged last week. In the near-term, expect agency spreads to trade near current levels.
The best value can still be found in auction paper maturing 5 years and out. These callable structures still compare favorably to bullets because of the enhanced relative value on a yield spread basis.
Traders have seen a notable slowdown in new issue interest in this rally. The following table reflects last week’s total issuance and call activity across GSE issuers:
|Federal Farm Credit Banks||720,000,000||449,000,000|
|Federal Home Loan Banks||3,073,000,000||820,000,000|
|Federal Home Loan Mortgage Corp||1,108,500,000||630,000,000|
|Federal National Mortgage Association||–||88,000,000|
|Federal Agricultural Mortgage Corp||4,000,000||–|
The highlight of the agency coupon calendar in the week ahead will be Federal Home Loan Bank’s announcement on Wednesday of any plans to sell global bonds. Fannie Mae will have a benchmark note announcement on September 12th and Freddie Mac will have a reference note announcement on September 14th.
Last week, activity was focused on structured products particularly the longer step-ups. There was also demand for swaps with accounts coming out the front end and extending out the curve to the 5- to 7-year sector in both callables and bullets. Business continues to be centered around swap proposals and bid lists from end accounts and dealers.
Ricky Brillard, CPA
Vining Sparks, IBG