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)
- Government/Agency Space
- Bullets 2-3 tighter on short end, 10-year unchanged. All still wider YTD.
- Callables were tighter on the wings but unchanged at the 5-year maturity.
- Agency CMBS, MBS, and ARMs
- BQ Munis, 5-year 3 bps tighter, 10-year 4 bps tighter, 15-year 4 bps tighter.
- GM Munis, 5-year 2 bps tighter, 10-year 4 bps tighter, 15-year 4 bps tighter.
- Taxable Munis, 5-year 2 bps wider, 10-year 4 bps tighter, 15-year 6 bps wider.
- Corporates were 4-6 bps tighter, still wider YTD on 5-year and longer maturities.
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
“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.”
“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)
Federal Reserve: 8/6 Details of new 24x7x365 interbank settlement service to support instant payments
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
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 4/17: ARRC Announces Its Key Objectives for 2020
Fannie Mae: LIBOR Transition Webpage
Freddie Mac: LIBOR Transition Webpage