August 24, 2020
Breaking a two-week trend, Treasury yields drifted lower last week, and the curve flattened. The 2-10 spread closed 7 bps lower at 49 bps, right back at the 50 bps area we can’t seem to move materially higher or lower from for a long period of time. Meanwhile, the S&P 500 hit two new record highs last week.
Fannie/Freddie Refinancing Fee Update
Over the weekend, a WSJ article on Saturday said, “As of Friday, the agency was negotiating delaying the fee with industry groups but was opposed to canceling it outright, according to people familiar with the discussions.”.
Background from 8/17 Sector Update
On August 12th, both Fannie Mae and Freddie Mac announced a new 50bps ‘adverse market fee’ that will apply to substantially all refinancing transactions. The 50bps fee will be implemented, according to the Enterprises, due to increased risk and anticipated higher costs related to COVID-19 and will be effective on September 1st, 2020. This doesn’t appear to be a big impediment to elevated levels of refinance activity, many estimate the impact equivalent to an 1/8 increase in mortgage rates. The fee was met with strong pushback from the mortgage industry as well as the White House.
Treasurys are within a tight range from Friday’s close and stocks are headed higher. The Dow is up 1.0%, the S&P is up 0.5% and the NASDAQ is up 0.3%. The Treasury curve’s slope is unchanged from Friday’s close of 49 bps. From a yield perspective, Treasury bills are unchanged to 1 bp higher, 2- to 10-year maturities are unchanged to 1 bp higher, and long bonds are unchanged.
Food for Thought – GNMA Buyouts, Don’t Lose Sight of the Main Thing
A Bloomberg article titled Banks Poised for Mortgage Bond Windfall That May Burn Investors caught the attention of some investors last week. Certainly, the article has merit but it’s important to maintain a holistic view of what’s going on with GNMA MBS and not to lose sight of the biggest risk investors face today in premium mortgages.
First, GNMA buyouts aren’t a new thing, there is just the potential for more right now as the current economic environment is expected to increase defaults, especially when government stimulus and forbearance programs end. GNMA responded on June 29th trying to minimize what they probably view as unnecessary buyouts. Link here to their All Participant Memorandum.
Secondly, the main investor concern ought to still be focused on refis. True, buyouts push prepays higher (and can be lumpier) but it’s not the main thing. Consider two examples below and you’ll notice that the buyout component has grown, which is expected in an environment like today, but most prepayments are still borrowers refinancing their loans. In the months ahead, even with an expected uptick in defaults and buyouts, refinances will likely remain the main source of prepayments.
G2 30-Year 3.0% MBS issued in 2019
August 1mo CPR = 44.0 (Buyout component 3.4)
July 1mo CPR = 33.9 the (Buyout component 3.6)
June 1mo CPR = 23.3 the (Buyout component 0.8)
G2 Jumbo 30-Year 3.0% MBS issued in 2019
August 1mo CPR = 64.9 the (Buyout component 4.7)
July 1mo CPR = 48.7 the (Buyout component 3.3)
June 1mo CPR = 41.3 the (Buyout component 0.7)
Spread Commentary – Mixed Results
(Click links below for more details)
- Government/Agency Space
- Bullets 1-2 bps tighter on shorter maturities, 10-year tighter unchanged. All still wider YTD.
- Callables were 1-3 bps wider.
- Agency CMBS, MBS, and ARMs
- BQ Munis, 5-year 9 bps wider, 10-year 20 bps wider, 15-year 22 bps wider.
- GM Munis, 5-year 3 bps wider, 10-year 8 bps wider, 15-year 9 bps wider.
- Taxable Munis, 5-year 4 bps wider, 10-year 3 bps wider, 15-year 2 bps tighter.
- Corporates widened 3-10 bps steeper, 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 (August) | Monthly, 10th business day
“As of Friday, the agency was negotiating delaying the fee with industry groups but was opposed to canceling it outright, according to people familiar with the discussions.”
Freddie Mac: Mortgage Rates Inch Up
“Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing that the 30-year fixed-rate mortgage (FRM) averaged 2.99 percent.”
Vining Sparks: Coronavirus Chartbooks
PDF/Mobile: Coronavirus Chartbook (PDF)
Federal Reserve: 8/19 Minutes of the Federal Open Market Committee, July 28-29, 2020
Fannie Mae: 8/12 Lender Letter LL-2020-12 – New Adverse Market Refinance Fee
Federal Reserve: 8/11 Federal Reserve announces revised pricing for its Municipal Liquidity Facility
Federal Reserve: 8/10 Individual large bank capital requirements, effective October 1
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
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