August 12, 2019
Like last week, we find ourselves with lower yields from the Friday close coupled with even lower yields as markets open up on Monday morning. Last week, Treasury yields were down 6-10 bps on maturities ranging from 2-10 years. This morning, they are down another 7-8 bps. Like we wrote last week, “trade seems to trump all right now”. For this author, it is tempting to think the drastic move down in yields seems a bit overdone. In reality, it is probably more like hopeful thinking. Last week started with trade retaliations from China including a ban on agricultural imports and a weakening of their currency. The U.S. followed by labeling, mostly a symbolic act, China as a currency manipulator. The week didn’t improve from there. Three smaller central banks surprised markets with rate cuts and the economic data we did get (if it matters) wasn’t great, with the ISM Manufacturing Index coming in at its lowest level in three years. The icing on the cake were remarks from President Trump that validated the fears of many that trade negotiations are approaching the point of no return. Even as the U.S. economy looks “okay” by casual observation in many respective areas, it begs the question, how long can the United States remain an economic island?
- Agency Bullet spreads were unchanged.
- Agency Callables saw longer maturities widen by 3-10 bps.
- Corporates were 3-7 bps wider.
- Munis were mixed, short end tightened 8 bps and long end was wider by 14 bps.
- CMOs widened 5 bps on 5-year and 10-year buckets.
- Current coupon MBS were wider, 15-year was 2 bps wider and the 30-year 8 bp wider.
- By comparison, spreads on CMOs and MBS are now both wider YTD, and make these areas look relatively attractive.
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
“Most depositories have positioned their balance sheets for rising rates. Naturally, this came with increased exposure to falling rates. Given that interest rate risk has become more bidirectional in nature and the market is signaling a Fed ease, the question to ask right now is, should we begin to hedge against falling rates?”
“Now, though, there is more than $15 trillion in government debt around the world with negative yields. That means, essentially, that savers holding these bonds are paying the government to store their money.”
“The tool is known as the countercyclical capital buffer. It allows the Fed to require banks to hold more loss-absorbing capital should the economy show signs of overheating, or to keep less of it during bad economic times. The buffer applies generally to banks with more than $250 billion in assets, including firms such as JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc.”
Adjustable Rate Mortgage Market Update
Demand for new-issue hybrid ARMs slowed, which resulted in yield spreads to Treasurys widening last week.Continue Reading
Agency Market Update
Spreads for bullets were unchanged on the week while callables largely widened, particularly on the longer end of the curve. Spreads on callable bonds are now generally at the widest levels in over a month.Continue Reading
Fixed Rate Mortgage Market Update
Mortgages were unable to keep pace with Treasury prices last week as yield spreads for current coupon MBS to Treasurys widened, with 30-year widening by 8 bps and 15-year widening by 2 bps.Continue Reading
Municipal Market Update
Municipals prices strengthened daily though Wednesday, on Thursday they weakened, and on Friday they were mixed. New issue offerings are forecasted to be $7.6B for the trading week.Continue Reading
SBA Market Update
Yield spreads for fixed-rate SBA DCPC pools are currently tighter than the twelve-month average for all maturities and are trading at the tightest spread levels over the last year. Many floating-rate bond options currently offer similar and even higher yields than longer duration fixed-rate bonds, driven by an inverted yield curve between 3-month and 10-year Treasurys.Continue Reading
CMO Market Update
As detailed in the Weekly Recap, several economic and geopolitical factors pushed yields down week-over-week. The effect on CMOs was widening spreads, to the tune of 5 basis points for Agency PACs and Sequentials.Continue Reading