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
Last week, the 10-year note rose 7 basis points to 1.63%, remaining below its March ending level of 1.74%. On the data front, recent economic data confirmed that the U.S. economy is on an improving trajectory. The U.S. economy grew at an annualized rate of 6.4% in the first quarter, slightly below consensus expectations. Core […]Continue Reading
Agency Market Update
Treasury yields on the longer end of the curve resumed their march higher last week after three consecutive weeks of declines. The 5-year note increased by 3 basis points to 0.85% and 10-year notes increased by 7 basis points on the week to 1.63%. It was a busy week highlighted by the April FOMC meeting […]Continue Reading
Fixed Rate Mortgage Market Update
Fed Support The Federal Reserve’s agency mortgage purchases totaled $29.6bn last week. The Fed continues to focus on current production coupons as the most heavily purchased securities were UMBS 30-year 2.0s and 2.5s with total volumes of $11.8bn and $8.6bn, respectively. Last week Fed Chair Powell reiterated the Fed’s commitment to continue to add […]Continue Reading
Municipal Market Update
In this week’s Municipal Market Update, we highlight the following: Municipal prices were mostly steady on Monday and Tuesday, they weakened 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 Municipal Market Advisors (MMA) Triple-A […]Continue Reading
SBA Market Update
Fixed-Rate SBA DCPCs (SBAP) – May Auction This Week The May fixed-rate SBA DCPC auction this week should see strong investor interest as SBA DCPCs and SBICs offer superior convexity profiles to most residential MBS alternatives. Supply in the secondary market for SBA fixed rate product has not kept up with demand; new issuance in […]Continue Reading
CMO Market Update
Monthly Trade Summary Analytics on April CMO trades exhibited some mean reversion in terms of WAL and Effective Duration after investors extended out notably in March. Customer purchases of fixed-rate CMOs in March projected to have a base case WAL of about 5 years. In April, new investments averaged a 3.8-year WAL, which is more […]Continue Reading