Sector Update

August 10, 2020

Economic data was largely better than expected last week but the velocity of the recovery appeared to slow. Markets focused on the data showing continued progress though and, for the first time in the past five weeks, Treasury yields closed higher for the week ending August 7th. Yields increased 2-5 bps in a steeper fashion with longer maturities experiencing slightly larger increases.

Over the weekend, President Trump issued a number of executive orders after negotiations between Republicans and Democrats came to an apparent standstill. The orders include, among other things, an additional $300 in unemployment benefits with another $100 coming from states, help protecting renters from eviction, extension of student loan payment deferrals, and a deferral of the social security portion of the payroll tax. At the same time, U.S. and China trade tensions are heating back up.

Markets are relatively neutral from Friday’s close given the weekend executive orders and China trade tensions. The Dow is up 0.8%, the S&P is off 0.2% and the NASDAQ is off 0.8%. The Treasury curve’s slope is unchanged from Friday’s close of 44 bps. From a yield perspective, Treasury bills are unchanged, 2- to 10-year maturities are flat to 1 bp lower and long bonds are up 1 bp.

Food for Thought – Prepay Protection Continues to Look Compelling

As the Fed has driven prices higher on MBS, many investors have looked for ways to mitigate, or at least decrease, the prepayment risk inherent in MBS bonds. One of those ways is to look at specified pools with lower loan balances than a more generic pool. 100% New York pools are also popular as state taxes make it harder for a refi to make economic sense. Mathematically (and intuitively), we know a lower loan balance and/or higher fixed cost, all else equal, requires a larger rate decrease for a refinance to make economic sense for the borrower. There is history to support this.

For example, let us consider the 30-year 3% MBS issued in 2019 (FNCL 3 – 2019) against “loan balance” pools of the same vintage, such as the 30-year 3% MBS issued in 2019 with a maximum loan size of $125,000 (FNCL 3 – 2019 LB 125). For the most recent reading, the generic 30-year 3s of 2019 had a trailing 1-month CPR of 41 compared to 12 for the “125K max” pools issued in the same year. You can also see the 100% NY collateral has behaved favorably as well.

Yes, there is a “pay-up” associated with loan balance or 100% NY pools. However, given what we know coupled with historical evidence, the pay-up could be worthwhile as a form of insurance against prepayments.

Spread Commentary – Mostly Tighter Again, Broken Record

(Click links below for more details)

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 (August) | Monthly, 5th business day

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


Freddie Mac: Mortgage Rates Drop, Hitting a Record Low for the Eighth Time this Year

“We expect rates to stay low and continue to propel the purchase market forward. However, the main barrier to rising demand remains the lack of inventory, especially for entry-level homes.”


WSJ: To Some Investors, 10-Year Treasury Note Isn’t What It Was

“The combination has depressed the 10-year yield, leaving it stuck even as stocks rebound and measures of investors’ inflation expectations rise. That leaves some contending that the 10-year note is losing its qualities as a window on the economy, a hedge against nosediving stocks or a producer of steady, low-risk investment income.”

Vining Sparks: Coronavirus Chartbooks

PDF/Mobile: Coronavirus Chartbook (PDF)

Regulatory Links

OCC: 8/7 OCC Reduces September 2020 Assessments in Response to COVID-19

Federal Reserve: 8/6 Details of new 24x7x365 interbank settlement service to support instant payments

FHFA: 8/6 Multi-Fam Prop. Owners in Forbearance Required to Inform of Eviction Suspension and Tenant Protections

FDIC: 8/3 Additional Loan Accommodations Related to COVID-19 Event (FIL-74-2020)

FHFA: 7/31 Temporary Policy Allowing Purchase of Qualified Loans in Forbearance Extended

FDIC: 7/30 Proposed Revisions to the Call Report and the FFIEC 101 Report (FIL-73-2020)

Federal Reserve: 7/29 Federal Reserve issues FOMC statement

Federal Reserve: 7/28 FRB extends through 12/31 lending facilities scheduled to expire on or around 9/30

Federal Reserve: 7/17 FRB modifies MSLP to provide greater access to credit for nonprofit organizations

FDIC: 7/10 Consolidated Reports of Condition and Income for 2Q 2020 (FIL-69-2020)

FHFA: 7/9 FHFA Extends COVID-Related Loan Processing Flexibilities for FN/FH Through August

FDIC: 7/1 FFIEC Joint Statement on Managing the LIBOR Transition (FIL-68-2020)

Federal Reserve: 7/1 Minutes of the Federal Open Market Committee, June 9-10, 2020

LIBOR Transition Links

ARRC 8/7: ARRC Releases the SOFR Starter Kit

ARRC 7/8: ARRC Releases a Tool to Help Firms Move Internal Systems and Processes away from LIBOR

ARRC 6/30: Further Details Regarding Its Recommendation of Spread Adjustments for Cash Products

ARRC 6/30: Recommended Fallback Language for Private Student Loans

ARRC 6/30: Updated Recommended Hardwired Fallback Language for Syndicated Loans

ARRC 6/5: ARRC Welcomes CFPB’s Updated Consumer Handbook and Proposed Rule Facilitating Transition Away from LIBOR

ARRC 5/28: ARRC Welcomes FNMA and FHLMC’s LIBOR Transition Playbook

ARRC 5/27: ARRC Announces Best Practices for Completing Transition From LIBOR

ARRC 4/17: ARRC Announces Its Key Objectives for 2020

ARRC: 4/8:  ARRC Announces Recommendation of a Spread Adjustment Methodology for Cash Products

ARRC: Link to all ARRC Announcements

ARRC: Link to all ARRC Publications

ARRC: Link to ARRC Fallback Contract Language

Fannie Mae: LIBOR Transition Webpage

Freddie Mac: LIBOR Transition Webpage

The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
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