April 1, 2019
Treasury yields closed out the quarter lower for the fourth straight week. Looking back, the first quarter was fairly smooth through March 1st with the 5yr, for example, trading in about a 20bps range. In fact, on March 1st, Treasury yields were still +/- 7bps from where they began the year. However, markets trade on expectations and if you have a moment to watch today’s Market Watch video (less than 5 minutes), recent data seems to lean towards headwinds for growth. This morning though, the ISM Manufacturing Index and Construction Spending figures were stronger than expected and 5yr and 10yr Treasury yields are up 4 and 3bps on the news, respectively.
Q2 2019 Expectations
- It is certainly possible that the recent Treasury rally is overdone and yields could bounce back some.
- Absent a trade deal with China, better global economic activity, meaningful changes in inflation expectations, and/or a Fed that somewhat changes its “doveish” tune, yields may not return to recent highs though.
Q1 2019 Spread Commentary
- During Q1 2019, spreads pushed tighter in every sector we monitor except for Agency CMOs.
- The biggest winners in Q1 were owners of long duration as Treasury yields plummeted and/or credit exposure.
- For the quarter, longer Agency Bullets tightened more than shorter maturities as their curve flattened.
- Agency Callables tightened, more so in longer maturities. They have pushed back over the past month though.
- Corporates tightened up by 20-30bps across maturities.
- BQ Municipals tightened by 30-45bps across their curve.
- CMOs bucked the trend and widened by 10-20bps. There should be some relative value in this sector.
- MBS tightened marginally by 7-10bps.
What We’re Reading
“The yield on benchmark 10-year notes dropped to a 15-month low of 2.34 percent on Thursday amid speculation growth is faltering enough to trigger a Federal Reserve interest-rate cut this year. But there’s been little tangible U.S. data to justify that.”
“Now, a sharp drop in Treasury yields has stirred a debate among investors about whether to take heart from the Fed’s pivot to a more growth-friendly posture or be wary of the potentially troubling causes that prompted the central bank’s shift.”
Adjustable Rate Mortgage Market Update
Yield spreads on hybrid ARMs to Treasuries widened approximately 1 to 2 basis points last week. We continue to see relative value in ARMs as they remain 10 to 20 bps wider compared to levels in early December.Continue Reading
Agency Market Update
Agency bullets basically moved in line with government debt, while callables continued to widen out.Continue Reading
Fixed Rate Mortgage Market Update
Yield spreads on current production MBS to Treasuries were mixed last week, with 15-year tightening 2 bps to 43 bps, while 30-year widened 5 bps to 70 bps.Continue Reading
Municipal Market Update
Municipal prices were stronger on Monday, steady on Tuesday, stronger again on Wednesday, and steady on Thursday and Friday. New issue offerings are forecasted to be $5.5B this week.Continue Reading
SBA Market Update
Fixed-rate SBICs and DCPC pools remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.Continue Reading
CMO Market Update
In the month of March, CMO spreads to Treasurys widened for three consecutive weeks, but were unchanged last week to close out the month and quarter.Continue Reading