August 26, 2019
After three straight weeks of declines in Treasury yields, last week finally provided us with something a little different. The yield curve flattened, pivoting at the 5-year point. Shorter maturities saw yields increase by 2-9bps and longer maturities declined 1-2bps.
The yield curve resembles the shape of a “U” and is indicative of a struggle between what markets expect and what the Fed is willing to do. Not to make light of the intricacies of global markets but eventually someone will be “right”. A host of inputs will drive what happens but two at the top of the list are trade negotiations and the health of the U.S. economy.
If you follow along in the Market Today or Weekly Recap, to say the trade situation is volatile is an understatement. I am still a skeptic of imminent progress being made on trade; however, I also think President Trump is aware that a reelection campaign will be difficult with even the impression of a poorly performing economy.
Where does this leave investors? With so much volatility, and the potential for more, one strategy is to look at investments, within your risk tolerances, that perform well in a range of +/- 50 to 100bps. The Investment Alternatives Matrix provides a convenient means to perform this analysis. An updated version will be available tomorrow afternoon and if you have any questions or want more tailored input, please don’t hesitate to reach out.
- Agency Bullet spreads were unchanged.
- Agency Callables were virtually unchanged on the week.
- Corporates were virtually unchanged on the week.
- Munis tightened at 5- and 15-year maturities and 10-year was +2bps.
- CMOs were flat except 5-year PACs were +2bps.
- MBS were wider with 15-year +5bps and 30-year +4bps.
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
“In softening his rhetoric, Mr. Trump also sowed some confusion. Mr. Trump said China had called U.S. officials on the previous evening and said “let’s get back to the table.” That assertion was quickly refuted by the spokesman for the Chinese Foreign Ministry, Geng Shuang, who said he was “not aware of” such a phone call by China to the U.S.”
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.”
Adjustable Rate Mortgage Market Update
Demand for new-issue hybrid ARMs slowed, which resulted in yield spreads to Treasurys widening 1 to 2 basis points last week. ARMs outperformed their fixed-rate MBS counterparts, with yield spreads widening 5 bps on the 15-year fixed and 4 bps on the 30-year fixed.Continue Reading
Agency Market Update
Spreads for agency bullets have not changed materially over the past several weeks. Callables have widened in recent weeks but spreads did not move much last week.Continue Reading
Fixed Rate Mortgage Market Update
Yield spreads for current coupon MBS to Treasurys continued their widening trend, with 30-year widening by 4 bps to 98 bps, while 15-year increased 5 bps to 66 bps. Yield spreads are near multi-year highs, as investors have sought greater levels of compensation due to premium pricing.Continue Reading
Municipal Market Update
Municipal prices were mixed daily throughout the week. New issue offerings are forecasted to be $6.2B for the trading week.Continue Reading
SBA Market Update
Yield spreads on fixed-rate 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
Last week saw mixed movement in Treasury yields and little change in CMO spreads. Yields rose for Treasurys maturing in 3 months to 3 years, while yields for intermediate to longer notes and bonds declined 1-2 basis points.Continue Reading