Sector Update

April 8, 2019

We mentioned last week the possibility that the decline in Treasury yields during March was overdone. Apparently, markets had enough and after four straight weeks of declines, yields closed out last week higher by 3-10bps on maturities 1-year and longer. Key drivers of higher yields included better economic news out of China, a bounce back in the ISM manufacturing index, and more progress on a trade-deal with China. Overall, there is still a great deal of unease in markets regarding where we go from here. To that end, I invite you to listen in on the Vining Sparks 2nd Quarter Economic Outlook Webinar this Thursday. You can register to attend here.


Spread Commentary

What We’re Reading

Vining Sparks:

Market Today | Weekly Recap | MBS Prepay Commentary (April) 


WSJ: Expected Earnings Pullback Sets Up Big Test for Bull Market

“So far, investors appear to have been looking past the expected profit crunch thanks to a more accommodative Federal Reserve. The central bank earlier this year decided to put interest-rate increases on hold for the rest of 2019, helping to stoke investors’ demand for riskier assets to push the S&P 500 up more than 15% since January—its best start to a year since 1998.”


Bloomberg: The Inverted Yield Curve Deserves Better Scrutiny

“On March 22, the yield on the benchmark 10-year Treasury note fell to 2.42 percent, dropping below rates on three-month bills for the first time since July 2007. The logical conclusion is that if a recession followed the past six inversions, the next one must be on the way. That’s not a fact, but it’s a belief that has permeated the investment community, with many market commentators citing prior inversions to confirm their conclusion that a recession must now be imminent.”

Sector Updates

Adjustable Rate Mortgage Market Update

March was a challenging month for hybrid ARMs, with spreads widening approximately 10 or 11 basis points.  The widening was driven by the reduced demand at higher dollar prices into the rally.

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Agency Market Update

Agency bullets basically moved in line with government debt, while callables tightened in on the week. Currently 3- and 5-year agency bullet spreads are at 6 and 8 basis points, respectively. Callables tightened on the week by 3-10bps, the most occurring in longer maturities.

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Fixed Rate Mortgage Market Update

Yield spreads on current production MBS to Treasuries were mixed last week, with 15-year widening 2 bps to 45 bps, while 30-year tightened 4 bps to 66 bps.  Despite the modest tightening this year, the MBS sector remains appealing as municipals, callable agencies, and corporates have tightened significantly more.

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Municipal Market Update

Municipal prices were weaker on Monday, steady on Tuesday, weaker again on Wednesday, and steady again on Thursday and Friday. New issue offerings are forecasted to be $6.7B this week.

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SBA Market Update

The April fixed-rate DCPC auction Thursday is expected to draw investor interest as many portfolio managers are considering strategies to extend duration and call structures to protect against falling rates.  Fixed-rate SBA DCPC pools and SBIC debentures remain attractive as they offer superior convexity profiles to most residential MBS alternatives.

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CMO Market Update

CMO spreads to Treasurys were unchanged for the second consecutive week.

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