April 20, 2020
Last week markets proceeded in a cautiously-optimistic fashion. Coming off a week where the S&P was up 12.1%, it wasn’t surprising that stocks started the week down on Monday. They then hit a weekly high on Tuesday that wasn’t surpassed until Friday morning. The pop on Friday was largely based on a report that Gilead’s Remdesivir drug, in a Chicago trial, showed “rapid recoveries in fever and respiratory symptoms” in patients with COVID-19. The yield curve gave up some steepness as it ended the week 6 bps flatter as yields moved down up to 8 bps in a flattening fashion on maturities between 2- and 10-years. So far this morning, stocks are off slightly, and Treasury yields are +/- 1 bp from their close on Friday.
There is shock this morning as WTI Crude is at $0.25 per barrel for May delivery. The CME Group has also clarified this morning that futures can trade negative, that’s a reassuring sign. Right now, this appears as some sort of a short-term aberration as June contracts are at $22.25 per barrel. However, demand destruction for oil is very real and storage capacity is disappearing as we speak. According to the U.S. Energy Information Administration, 57% of U.S. working storage capacity is currently utilized. A month ago it stood at 50%.
An ongoing theme, it might qualify as a saga now, with mortgage servicers continued to play out in headlines last week. There is a large and growing coalition pushing for a temporary liquidity facility to help servicers bridge the gap between making payments to investors and receiving reimbursements from Fannie and Freddie. No one debates there will be stress on servicers, but it depends greatly on who you ask as to the expected severity and the ability for servicers to manage them. On one hand, the servicers say this is basically a catastrophic situation for them. On the other hand, Mark Calabria head of the FHFA who oversees Fannie and Freddie, calls servicers concerns “spin”. Only time will tell, but as it stands right now, the FHFA is standing against a growing chorus of market participants to do something.
SBA PPP Links
Treasury: PPP Loans Frequently Asked Questions
Federal Reserve: Paycheck Protection Program Lending Facility (PPPLF) Term Sheet
Federal Reserve: PPPLF Frequently Asked Questions
Notable news from this past week includes:
- Amazon allowed third-party sellers to resume shipping nonessential items.
- Mortgage servicers, with help, continued to push for a liquidity facility.
- SBA 7(a) prepayment speeds were released. Big decline, expect more next month.
- The PPP exhausted its funds on Thursday, there are plans for more in motion.
- The SBA and Treasury provided comments on the PPP so far, the data is more interesting in my opinion.
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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)
Tuesday (5/12): Banks: The End of LIBOR (1 CPE)
Thursday (5/14): Credit Unions: The End of LIBOR (1 CPE)
Food for Thought: Prepay Speeds Did What? Part Two.
- Last week, I commented on sizable increases in Residential MBS (RMBS) prepayments.
- This week let’s look at a subset of Commercial MBS (CMBS) prepayments in SBA 7(a) pools.
- Nationwide social distancing measures were reflected in prepayments as speeds widely declined.
- The CARES Act authorized $17 Billion in P&I relief for existing SBA loans for 6-months.
- It is likely that prepayments will all but slow to a trickle over the coming months for two reasons.
- First, little/no incentive (ability?) to refinance right now.
- Second, defaults should remain low, at least until the 6-month debt relief program ends.
- Full commentary is available here.
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 (April) | 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.
Vining Sparks: Coronavirus Chartbooks
PDF/Mobile: Coronavirus Chartbook (PDF/Mobile)
Adjustable Rate Mortgage Market Update
In a continuing trend, yield spreads on Ginnie ARMs tightened 5 basis points while conventional ARMs tightened 15 to 16 basis points on the week. Contrary to their adjustable-rate counterparts, 15- and 30-year fixed-rate mortgages widened 18 and 12 basis points, respectively, on the week.Continue Reading
Agency Market Update
Agency bullets mostly moved in line with Treasurys last week. Callables widened on the week for maturities of 5 years and longer, while shorter term callables tightened in.Continue Reading
Fixed Rate Mortgage Market Update
Although nominal spreads moved wider last week, we continued to see financial institutions selling TBA-deliverable securities, due to the improvement in pricing over the past month. Proceeds and new investments have been focused on non-deliverable MBS and sectors with wider spreads (CMOs, CMBS, Municipals, Corporates).Continue Reading
Municipal Market Update
Municipal prices strengthened on Monday and Tuesday, and where steady daily for the rest of the week. New-issue offerings are forecasted to be just under $4.0B for the trading week.Continue Reading
SBA Market Update
The effects of nationwide social distancing measures were reflected in prepayments for floating-rate 7(a) pools, as speeds on both Equipment and Real-Estate loan pools experienced widespread decreases for the month of April. Current yield spreads on SBA DCPCs and SBICs widened last week, pricing at approximately 109 and 120 bps, respectively, or wider to Treasurys.Continue Reading
CMO Market Update
Last week, we saw a continuation of recent themes in the CMO space. Spreads to Treasurys for fixed and floating rate bonds tightened for the 4th consecutive week in what has been a slow, steady movement. Despite this tightening trend, investors looking for amortizing product should still find value in CMOs relative to MBS where Fed intervention persists.Continue Reading