April 6, 2020
The big news last week, on the heels of the passage of the $2 Trillion CARES Act, was a provision aimed at helping small business. Called the Paycheck Protection Program (PPP), it establishes a pool of funds totaling approximately $349 Billion in loans (which are forgivable under certain circumstances) and is administered under the Small Business Administration’s 7(a) program. We wrote a Strategic Insight that featured the PPP as well as other ways for depositories to defend their bottom lines moving forward. Below I’ve continued a (hopefully) helpful list of links to resources.
The general mood in markets this morning is one of optimism. So far today, U.S. equity indices have already earned back last week’s losses and tacked on some gains. Treasury yields are up 2-6 bps across the curve. I am certain that as a country we will conquer and rebound from this pandemic but I think it may take longer than we all hope for though for a couple reasons. First, the “cure” for what ails (social distancing) will likely cause continued and probable further economic slowdowns. Second, have we already forgotten the two back-to-back “chart breaking” initial jobless claims numbers? Last week’s 6.6 Million is roughly 10 times that of the previous weekly high during the Financial Crisis. True, continuing claims (3 Million) are “only” 45% of the previous peak of 6.6 Million but it’s safe to assume we’re headed back that direction. Like most businesses, many Americans’ “balance sheets” are not designed to absorb a sudden and totally unexpected loss of revenue. Record stimulus measures will no doubt help ease these burdens, but it takes time and time is of the essence for many Americans.
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Tuesday (4/7): 2020 Quarterly Economic Outlook Webinar
Tuesday (4/14): Banks: Balance Sheet Management and Your Loan Portfolio
Thursday (4/16): Credit Unions: Loan Participation Market Overview
Food for Thought
- The Fed absolutely sees and hears about these figures and there is serious talk (and the ability) for the Fed to also intervene in the Muni market.
- As was the case in March, spreads this wide on high-quality assets is a symptom of illiquidity.
- The Fed will want to cure illiquidity and quash spreads in the process.
- I’m not certain they can be as effective in Muis as they have been in RMBS and CMBS.
- I wouldn’t want to bet against their balance sheet capacity though.
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 (March) | Monthly, 5th business day
SBA Prepay Commentary (March) | Monthly, 10th business day
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 – 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.
“That has proved daunting to the companies, many of which are nonbanks and don’t have deposits or other business lines to cushion them. Nonbank lenders originate about 60% of U.S. mortgages.”
“Calmed by Congress, muni selling has slowed for now, according to MSRB data. But with a vast chunk of the market sitting in mutual and exchange-traded funds that investors can easily exit, another shock could provoke further outflows, causing prices to plummet again, analysts and money managers said.”
Vining Sparks: Coronavirus Chartbooks
PowerPoint: Coronavirus Chartbook (PWPT)
PDF/Mobile: Coronavirus Chartbook (PDF/Mobile)
Adjustable Rate Mortgage Market Update
While the 10-year U.S. Treasury yield ended the week near the previous Friday’s level, the 2s10s curve has given up almost all of the steepening observed over the first half of 2021. The flatter curve reflects a recalibration of expectations for Fed policy following the Fed’s hawkish policy shift at their June meeting. This week’s […]Continue Reading
Agency Market Update
In the past month, the highly contagious Delta variant has led to a parabolic surge in cases in the U.S., mimicking the recent waves seen in the U.K. and Israel, despite the strong vaccine penetration in all three nations. These developments have led to investors seeking safety haven assets like bonds, sending yields steadily lower […]Continue Reading
Fixed Rate Mortgage Market Update
Current Yield Spreads Concern over the spread of the Delta variant sent the 10-year Treasury down to 1.13% early last week before it recovered to finish the week at 1.28%. MBS yield spreads were mixed on the week. Spreads on 15-year MBS (1.5s) tightened by 2 bps to 38 bps, while yield spreads on 30-year […]Continue Reading
Municipal Market Update
In this week’s Municipal Market Update, we highlight the following: Municipal prices strengthened to start last week, were steady across the curve on Tuesday, were mixed on Wednesday and Thursday, and were steady on Friday, as reflected by weekly data for the Municipal Market Data (MMD) Triple-A Scale; also shown are the yields for the […]Continue Reading
SBA Market Update
Fixed-Rate SBA DCPCs (SBAP) Investor interest in the August fixed-rate SBA DCPC auction next week is expected to remain strong as SBA DCPCs and SBICs offer superior convexity profiles to most residential MBS alternatives. The DCPC auction has priced at historically tight spreads this year; however, spreads widened 13 bps month over month. Supply in […]Continue Reading
CMO Market Update
Last week’s CMO update discussed how the recent decline in rates could lead to a 1.00% yield becoming less attainable for bonds with a 3-5 year WAL, the portion of the curve in which our customers typically traffic. Our weekly Investment Alternatives Matrix was released the following day (TSY and CMO sections shown below), with […]Continue Reading