April 13, 2020
Last week started with a tone of optimism in markets and it continued throughout the week. The yield curve steepened by 13 bps and the S&P ended the week up 12.1%, its single best week since 1974. A common theme growing in markets over the past two weeks or so was state and local governments seeking aid from the Federal government. On Friday, the Federal Reserve announced a Municipal Liquidity Facility which will consist of a SPV enabled to purchase eligible notes with maturities of 24 months or less from issuance. The Fed announced other notable programs on Friday as well. I invite you to read our Strategic Insight we published on the matters.
Federal Reserve: Paycheck Protection Program Lending Facility (PPPLF) Term Sheet
Federal Reserve: PPPLF Frequently Asked Questions
Treasury: PPP Loans Frequently Asked Questions
Notable news from this past week includes:
- FHFA says they’re not bailing out servicers of MBS, see our Prepay Commentary.
- McDonald’s global same store sales were down 22% in March, domestically they were down 13%.
- Mortgage applications were down 17.9% for the week ending April 3rd.
- According to a report from the National Multifamily Housing Council, nearly 33% of American renters failed to pay rent in the first week of April.
- OPEC+ cuts output by 9.7mm barrels a day; however, demand is estimated to be down nearly 20mm barrels a day.
The general mood in markets this morning seems one of caution, perhaps cautious optimism. Officials across the world are weighing how and when to gradually start to reopen economies. The obvious downside is that easing off social distancing measures will certainly lead to more cases of COVID-19 though. For example, some travel restrictions were relaxed in Wuhan last week and in a short time increased cases were announced. This week will surely feature more dour economic news, but so much of it is already expected that it’s unlikely, by itself, to move markets. Stimulus checks, announced in the CARES Act on March 27th (which feels like an eternity ago), are reported to begin this week by the IRS. So far today, U.S. equity indices are down between 1-2% and Treasury yields are virtually flat from Thursday’s close.
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Tuesday (4/14): Banks: Balance Sheet Management and Your Loan Portfolio (1 CPE)
Thursday (4/16): Credit Unions: Loan Participation Market Overview (1 CPE)
Tuesday (4/21): Banks: Balance Sheet Management in the Current Markets (2 CPE)
Thursday (4/23): Credit Unions: Balance Sheet Management in the Current Markets (1 CPE)
Food for Thought: Prepay Speeds Did What?
- Prepay speeds reported in April (for activity in March), were markedly higher than the previous month.
- How could prepayments have increased given all that is going on? Basically, it boils down to timing.
- I think there is a good case to be made for elevated prepays reported next month as well.
- Hard for me to imagine them not slowing down in June though, time will tell.
What We’re Reading
Market Today | Daily
Weekly Recap | Weekly, Friday
Brokered Deposit Rate Indications | Weekly, Monday
Investment Alternatives Matrix | Weekly, Tuesday
MBS Prepay Commentary (April) | Monthly, 5th business day
SBA Prepay Commentary (March) | Monthly, 10th business day
Strategic Insight: Fed Announces $2.3 Trillion of Additional Support to the Economy
This Strategic Insight looks at additional measures the Federal Reserve took on April 9th and describes them while providing a takeaway for how we think they will affect financial institutions.
Strategic Insight: Potential for Selling Held-to-Maturity Securities for Liquidity Purposes
Based on this guidance from the FDIC, we believe financial institutions that have been negatively impacted by a reduction of liquidity due to COVID-19 may be able to sell securities classified as HTM without tainting a portfolio or jeopardizing the ability to use this classification in the future. However, each bank should check with its financial statement auditor for further clarification.
Strategic Insight: Defending Your Bottom Line – Phase II: Wholesale Borrowings and Leverage
In terms of depositories defending their bottom lines, Phase I of deploying excess cash seems to be winding down. This Strategic Insight addresses different ways to fund leverages (traditional and otherwise) and uses of those proceeds. Notably, the Paycheck Protection Program (PPP) to be operated under the SBA 7(a) umbrella.
VS Interest Rate Products: Hedging Short-Term or Floating Rate Funding
Here is a presentation explaining a short-term funding hedge strategy. The current dislocation in LIBOR results in a negative funding cost for the first 3-month period (assuming we use 3-month FHLB advances as the borrowing source). Those executing this strategy should expect their funding cost to approximate the fixed rate on the swap plus/minus the normal spread between 3-month LIBOR and their borrowing source. Normal spreads can be seen in the presentation. The presentation also includes information on the accounting for this transaction. Of course, we provide all the accounting support.
Vining Sparks: Coronavirus Chartbooks
PowerPoint: Coronavirus Chartbook (PWPT)
PDF/Mobile: Coronavirus Chartbook (PDF/Mobile)
Adjustable Rate Mortgage Market Update
Since the rally at the end of 2018, ARM pricing spreads have widened significantly, reacting strongly to each move lower in rates. For example, 5/1 ARMs have a 120 bp spread, almost 100 bps wider than they were in early-December 2018. Longer-reset 7/1s and 10/1s have a 135 and 140 bp spread, respectively, approximately 102 and 93 bps wider than levels in early-December 2018.Continue Reading
Agency Market Update
Agency bullet spreads were mostly unchanged last week. Callables were little changed as well but for some 2- and 3-year paper that tightened in by a couple of basis points. Both agency bullets and callables remain extremely wide from a spread basis, although investors must stomach absolute yields being near multiyear lows.Continue Reading
Fixed Rate Mortgage Market Update
Since March 16 the Fed has purchased $446bn of agency mortgage-backed securities as part of its continued effort to stabilize the sector and improve financial conditions. The unprecedented scale of Fed purchases has significantly reduced price and spread volatility in the sector. Prices have been pushed far higher and spreads have narrowed from stressed levels.Continue Reading
Municipal Market Update
Municipal prices strengthened daily. New-issue offerings are forecasted to be just over $2.8B for the trading week.Continue Reading
SBA Market Update
Current yield spreads on newer and seasoned SBA DCPCs and SBICs have widened over the last month and are pricing at approximately 100 and 120 bps, respectively, or wider to Treasurys.Continue Reading
CMO Market Update
CMO spreads tightened again last week, but are holding up well compared to the MBS space as Fed purchases continue to have a more dramatic effect on spreads for 15- and 30-year passthroughs. Again, while the Fed is not purchasing CMOs, ultimately the Fed’s MBS purchases will have an effect on new issuance in the CMO space. With that said, investors looking for additional spread from amortizing product should find value in Agency CMOs.Continue Reading