August 31, 2020
After taking a week off, Treasury yields increased for a third week out of the last four and the yield curve steepened substantially. The 2-10 spread closed 10 bps higher at 59 bps. Previously, I’ve written we haven’t seen it break above 50 bps for a meaningful amount of time. However, it looks like we could be on an up trend now as markets search for a new level. It makes sense as the Fed is holding down shorter rates while their policy stance change aims to be more inflationary.
Also, new this week, we added a Vining Sparks Interest Rate Products section under Sector Commentary.
Another Fannie/Freddie Refinancing Fee Update
Last week, the FHFA directed Fannie and Freddie to delay the implementation of the previously-announced “Adverse Market Refinance Fee” until December 1, 2020. They also announced loans with balances below $125,000 or made through other “affordable refinance products” would be exempt from the fee.
From 8/24 Sector 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.
Food for Thought – Taking Gains – Current and Anticipated Needs Change
Most portfolio managers, especially those at depositories, find themselves with ample cashflow and liquidity. Naturally, much focus is placed on purchasing investments. Part of managing a portfolio also includes considering strategic sales of positions. It’s not uncommon to see 2-5% gains in MBS purchased last year through March(ish) of this year. In Municipal positions, including ones that have been pre-refunded (effectively called), it is possible to see gains of 7-10%.
To say much has changed since purchases made even earlier this year, is an understatement. Since April, the Fed has become deeply entrenched in the mortgage market, Treasury yields have dropped approximately 140 bps, and earnings for 2020 and 2021 are less clear. The point is some investments may be ripe to harvest gains from as that may better suit your current and anticipated needs. If you’d like help evaluating or discussing the pros and cons of taking gains, please don’t hesitate to reach out.
(Click links below for more details)
- Government/Agency Space
- Bullets mixed, short maturities slightly tighter.
- Longer maturities slightly wider to unchanged.
- Callables 2-8 bps tighter on 5-year and longer maturities.
- Agency CMBS, MBS, and ARMs
- BQ Munis, 5-year 9 bps wider, 10-year unchanged, 15-year 6 bps tighter.
- GM Munis, 5-year unchanged, 10-year 9 bps tighter, 15-year 15 bps tighter.
- Taxable Munis, 5-year 4 bps wider, 10-year 4 bps wider, 15-year 3 bps wider.
- Corporates unchanged on the week.
- Vining Sparks Interest Rate Products
- Hedging themes continue to focus on taking advantage of low rate environment.
- Last week’s activity dominated by commercial loan hedging and
- Fixing rates on floating rate liabilities.
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
“The FDIC said the 4,624 community banks in its data actually posted an aggregate increase in net income of $202.5 million.”
Vining Sparks: Coronavirus Chartbooks
PDF/Mobile: Coronavirus Chartbook (PDF)
Fannie Mae: 8/27 Updated Eight Lender Letters
FDIC: 8/25 Quarterly Banking Profile Released (2Q 2020)
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