August 19, 2019
I wrote in the last publication how I was tempted to think the drastic move down in yields seemed a bit overdone, but chalked it up to wishful thinking. Unfortunately, that seemed the case again last week. Last week marked the third straight week of declining Treasury yields as we saw a drop of 16-19 bps on maturities ranging from 2-10 years. For those keeping score, in the month of August yields have declined 35-40 bps, half of which we saw last week.
Markets began last week on high-alert as protestors essentially closed airports in Hong Kong and all remaining flights were cancelled. On Wednesday, the 2s to 10s inverted, among other reasons because China reported their slowest industrial production numbers in 17-years with a miss on retail sales to boot. Markets reacted swiftly as the Dow dropped 800 points on Wednesday and Treasury yields reached lows not seen since 2016 on Thursday. Markets are growing tired of tariff delays or other “signs of progress” and seek action.
This week is relatively quiet on the economic front. The most interesting thing to watch, other than trade related headlines, will be the Jackson Hole Symposium this Thursday and Friday. A real curveball would be the Fed positioning for an intra-meeting rate cut. Yields are up 4-5 bps this morning on pledges from around the world to stimulate economic activity.
- Agency Bullet spreads were unchanged.
- Agency Callables widened appreciably, especially longer maturities.
- Corporates were virtually flat at 1-2 bps tighter on the week.
- Munis lagged the decline in Treasury yields and widened 9-13 bps.
- CMOs widened 2 bps across the board.
- MBS were wider on the week with 15-year +5 bps and 30-year +12 bps.
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 (August) | Monthly, 10th business day
“Elkhart, Ind., is flashing a warning sign that a recession could be just ahead. Capital of the country’s recreational-vehicle industry, the northern Indiana city and the surrounding area are watched by economists and investors for early indications of waning consumer demand for luxury items, often the first sign of economic anxiety.”
Vining Sparks: Strategic Insight: CMBS Series | Fannie Mae DUS
“Fannie Mae DUS are typically used as an alternative to Agency bullets. From an interest rate risk perspective, they are comparable to a similar duration bullet. From a return perspective … investors can earn an attractive spread pick-up.”
“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?”
Adjustable Rate Mortgage Market Update
Demand for new-issue hybrid ARMs slowed, which resulted in yield spreads to Treasurys widening 3 to 5 basis points last week. ARMs outperformed their fixed-rate MBS counterparts, with yield spreads widening 5 bps on the 15-year fixed and 12 bps on the 30-year fixed.Continue Reading
Agency Market Update
Spreads for bullets were unchanged on the week while callables continued to widen. Spreads on callable bonds are now generally at the widest levels of the year, and less structured intermediate maturity securities are trading at spreads not seen in nearly a decade.Continue Reading
Fixed Rate Mortgage Market Update
Yield spreads for current coupon MBS to Treasurys widened for the second consecutive week, with 30-year widening by 12 bps to 94 bps, while 15-year increased 5 bps to 61 bps.Continue Reading
Municipal Market Update
Municipal prices were mixed on Monday and Tuesday, they strengthened on Wednesday, and were steady on Thursday and Friday. New issue offerings are forecasted to be $6.35B for the trading week.Continue Reading
SBA Market Update
Fixed-rate SBA DCPC pools and SBIC debentures remain attractive as they offer superior convexity profiles to most residential MBS alternatives. 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
Treasury yields declined again last week, leaving CMO spreads 2 basis points wider. As shown in the Spread Snapshot from the overall commentary, CMO spreads are roughly 30 basis points wider YTD.Continue Reading