Sector Update

April 27, 2020

Last week markets were remarkably calm given the disastrous economic news releases. Spreads were generally tighter in the sectors we monitor as well. The calmness and spread tightening are potentially an indication of just how much bad news is already priced into markets. On the flip side, it could also be indicative of how much influence the Fed has over markets currently. In truth, it is certainly a mixture of both. This week we have an FOMC announcement and Q1 GDP to look forward to. There are also more corporate earnings statements on tap. Of interest, Verizon reported that their call volumes are significantly higher, about 800 million phone calls per day. According to Verizon’s CEO, that is double the calls that typically occur just on Mother’s Day happening every day now. So far this morning, stocks are working on erasing last week’s losses, and Treasury yields are generally headed up.

Oil Prices

Not long after we wrote last Monday that the CME Group clarified oil futures can trade negative, it happened. In a day of trading like no one has ever witnessed, the May contract closed at negative $37.63 on Monday. Oil bounced back during the week as contracts rolled closing Friday at $16.94; however, oil is under pressure again this morning. Currently oil is down approximately 25% to $12.62 per barrel for June delivery. Storage capacity continues to diminish. According to the U.S. Energy Information Administration, 60% of U.S. working storage capacity is currently utilized. More importantly, in Cushing, Oklahoma, 76% of capacity is utilized as of April 17^th, the prior week it was at 69%. As contract expiration approaches on/around May 19^th, it will likely be interesting to watch again.

Mortgage Servicers

Last week we wrote in regard to Mortgage Servicers, “Only time will tell, but as it stands right now, the FHFA is standing against a growing chorus of market participants to do something.” It didn’t take long as the FHFA announced on Tuesday that the “advance obligation limit” for servicers would be capped at 4 months. While it is not the liquidity facility servicers wanted, it does help put a lasso around potential commitments.

SBA PPP Links

Treasury: How to Calculate Maximum Loan Amounts – By Business Type

NCUA: How to Become A Paycheck Protection Program Lender (4/23/2020)

Treasury: PPP Loans Frequently Asked Questions

SBA: Paycheck Protection Program

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

SBA: PPP Report | Approvals Through 12pm EST 4/16/2020

PPP Lending Facility (PPPLF)

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

Federal Reserve: PPPLF Frequently Asked Questions

Regulatory Links

FHFA: “No Lump Sum Required at the End of Forbearance” says FHFA’s Calabria

FHFA: Addresses Servicer Liquidity Concerns, Announces Four Month Advance Obligation Limit for Loans in Forbearance

FHFA: Announces that Enterprises will Purchase Qualified Loans in Forbearance to Keep Lending Flowing

Notable news from this past week includes:

Oil prices collapsed and closed on Monday (4/20) at -$37 per barrel

Mortgage servicers got relief. Only responsible for 4 months of missed payments.

Stores in Germany reopen to lackluster crowds.

Treasury “requests” publically traded companies return PPP loans.

The PPP received new funds and reopens today (4/27) at 10:30am EDT.

Upcoming Webinars – Click for more Information and Registration

Tuesday (5/12): Banks: The End of LIBOR (1 CPE)

Thursday (5/14): Credit Unions: The End of LIBOR (1 CPE)

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, 5^th business day

SBA Prepay Commentary (April) | Monthly, 10^th business day

WSJ: The Reach for Yield Survives Coronavirus Market Shock

Faced with withering share prices and falling yields on safe government bonds, portfolio managers are seeking out returns in an array of strategies that in some instances take them into esoteric corners of the financial markets.

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 9^thand 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.

Vining Sparks: Coronavirus Chartbooks

PDF/Mobile: Coronavirus Chartbook (PDF/Mobile)

Sector Updates

Adjustable Rate Mortgage Market Update

Last week, a reprieve in the back-up in Treasury yields proved to be short-lived as remarks from a key Fed leader reignited focus on the central bank’s plans for aggressive monetary policy tightening. New York Fed President, John Williams, stated that raising interest rates in 0.50% intervals was a “reasonable option.” The yield on the […]

Agency Market Update

The Treasury curve steepened last week as shorter-term yields declined while the longer end sold off, sending the 10-year yield to 2.83%, up another 12 basis points from the week before. With the 10-year yield moving higher, the 2s-to-10s spread had un-inverted the previous week, and last week the 3s-to-10s spread moved into positive territory […]

Fixed Rate Mortgage Market Update

Current Yield Spreads The Treasury curve steepened again last week as the market digested the latest inflation data. The 2s/10s slope increased 19 bps to 38 bps as the 2-year Treasury yield declined 6 bps to 2.45% and the 10-year Treasury yield increased 13 bps to 2.83%. Headline and core CPI for March accelerated from […]

Municipal Market Update

In this week’s Municipal Market Update, we highlight the following: Municipal prices weakened last Monday, were mixed on Tuesday and Wednesday, and steady on Thursday, as reflected by weekly data for the Municipal Market Data (MMD) Triple-A Scale; also shown are the yields for the Municipal Market Advisors (MMA) Triple-A Scale; New issue offerings for […]

SBA Market Update

Fixed-Rate SBA DCPCs (SBAP) Investor interest in fixed-rate SBA DCPCs remains strong as SBA DCPCs and SBICs offer superior convexity profiles to most residential MBS alternatives. The DCPC auction priced at historically tight spreads for much of 2021; however, spreads have widened approximately 90 bps since June 2021. Debenture rates increased and yield spreads widened […]

CMO Market Update

CMO activity was lighter than usual last week ahead of Thursday’s early close and the holiday weekend. One structure that saw decent demand was a 3.0% PAC off FNCL 4.0% collateral. Yield Book projects a WAL of 4.3 in the base case, with minimal extension in rising rates scenarios (around 5 years +300 bps). As […]