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
On the data front last week, retail sales rose a seasonally adjusted 0.7% after rebounding 0.7% in August from July’s 1.8% slide. As for monetary policy, we expect the Fed to commence asset purchase tapering in November, as indicated in its September meeting minutes. On the week, yield spreads on Ginnie and conventional ARMs were […]Continue Reading
Agency Market Update
Treasury yields resumed their march higher last week, at least in the intermediate portion of the curve, as the market continues to price in the Fed moving forward with tapering its asset purchases ahead of eventual rate hikes. As can be seen in the chart below, the 3-year note moved higher by 11 basis points […]Continue Reading
Fixed Rate Mortgage Market Update
Current Yield Spreads The Minutes from the Fed’s September meeting confirmed that officials are warming up to announcing their tapering plans soon. Most officials supported a plan developed by Fed staff that “was designed to be simple to communicate and entailed a gradual reduction in the pace of net asset purchases that, if begun later […]Continue Reading
Municipal Market Update
In this week’s Municipal Market Update, we highlight the following: Municipal prices were steady on Tuesday and Wednesday, mixed on Thursday, and steady again on Friday, 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 are […]Continue Reading
SBA Market Update
Fixed-Rate SBA DCPCs (SBAP) Investor interest in fixed-rate SBA product remains strong as SBA DCPCs and SBICs offer superior convexity profiles to most residential MBS alternatives. The DCPC auction has priced at historically tight spreads for much of this year; however, spreads have widened approximately 20 bps since June. Supply in the secondary market for […]Continue Reading
CMO Market Update
Treasury yields continue to rise, particularly in the 3-5 year portion of the curve where our customers are most active in the CMO sector. As a result, traders observed CMO spreads tighten 2 basis points last week for fixed and floating-rate bonds. For the maturities and structures we monitor, CMO spreads have moved in a […]Continue Reading