Sector Update

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.

ICBA: Detailing the Community Bank Provisions of the CARES Act

SBA: Coronavirus (COVID-19): Small Business Guidance & Loan Resources

SBA: Paycheck Protection Program

FDIC: The FDIC Announces a 30-Day Grace Period for the Call Report for the First Quarter of 2020

Federal Reserve: Agencies announce changes to the community bank leverage ratio (CBLR)

Federal Reserve: Paycheck Protection Program Lending Facility (PPPLF) Term Sheet

Federal Reserve: PPPLF Frequently Asked Questions

OCC: Revisions to the FFIEC Call Reports and FFIEC 101 for the March 31, 2020, Report Date

OCC: Capital Treatment for Paycheck Protection Program: Interim Final Rule

Treasury: PPP Loans Frequently Asked Questions

Notable news from this past week includes:

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?

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)

Sector Updates

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.

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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.

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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.

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Municipal Market Update

Municipal prices strengthened daily. New-issue offerings are forecasted to be just over $2.8B for the trading week.

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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.

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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.

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