September 9, 2019
Bond portfolio managers received a bit of a reprieve in the latter half of the week after news broke that China and the U.S. would resume trade talks in early October, sending yields higher for maturities of 2 years and longer. The lackluster jobs report Friday showed slower payroll growth but faster wage growth, not enough to move the market meaningfully, and Treasury yields ended the week Friday up 4 to 6 basis points in the 2- to 10-year part of the curve (and another 4 to 7 basis points higher this morning). Yields on 3- and 5-year bullets increased by 4 basis points to 1.55% and 1.52%, respectively. The market continues to price in a 25 basis points cut at the September FOMC meeting but the odds of a 50 basis point move at the meeting next week has fallen below 10%.
Spreads on agency bullets and callables tightened in marginally last week, with the sharpest moves coming on the longer end of the curve. Spreads on shorter lockout callable bonds (e.g. 5-year final maturity, 3-month lockout) remain near the widest levels in almost a decade, which should not come as a huge surprise given the Fed is likely loosen monetary policy over the near term. Callable product that looks the most attractive to this writer is 3-year paper with a onetime call in 6 months; supply may be limited but there is a Freddie Mac issue that is trading at spreads in the upper 40s, which equates to a yield to maturity at close to 2.00%. That appears to have a nice blend of spread and call structure.
The below table reflects last week’s total issuance and call activity across the primary GSE issuers. Call volume declined to $6.9 billion last week but was still elevated, and holders of callable paper can continue to expect heavy call volume given how far rates have fallen this year. 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 announced a $2 billion 3-year Benchmark note last week that priced at +7 basis points. The Federal Home Loan Bank has an announcement date this Wednesday, and Fannie Mae has another issuance date next Thursday, September 19th.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP