Sector Update

August 5, 2019

Last week, the 5-year Treasury opened up at a yield of 1.85. At this moment, it sits nearly 30bps lower at 1.54. What in the world happened? Last week we wrote “A 25bp cut is widely expected and, unless there are some surprises baked in (more/less aggressive stance, change in portfolio run-off plans, etc) yields will likely be driven by other factors.” Indeed, on Wednesday a 25bps cut was announced and everything was fairly normal until the Fed press conference began. In short order, any semblance of clarity one thought they gained, was quickly washed away. First, yields popped as investors digested the cut as just a “mid-cycle adjustment” but later fell as Powell explained he didn’t say “it’s just one” rate cut. Still, the 5-year Treasury ended Wednesday at a yield of 1.83, down only 2bps on the week! The real fireworks came Thursday as President Trump escalated trade tensions by announcing increased tariffs on Chinese imports. The 5-year Treasury ended Thursday at a yield of 1.68, now down 17bps on the week. Friday was relatively quiet and the 5-year dropped an additional 2bps to 1.66, for a total decline of 19bps on the week. Over the weekend, China announced their retaliation and markets have made their displeasure known. So far today, the 5-year treasury has dropped an additional 12bps to yield 1.54.

Market activity this week will likely be dominated by trade and markets looking to justify current levels by economic data releases. At this point, it is hard for me to imagine yields reacting in a meaningful way, in either direction, based on economic releases though as trade seems to trump all right now.

Spread Commentary

Agency Bullets wider by 1-2bps.

Agency Callables wider on short end by 7-8bps.

Corporates were 4bps wider.

Munis were 10-13bps wider.

CMOs were widened out 5bps on the short-end.

Current coupon MBS were mixed, the 15-year was 1bp tighter and the 30-year 1bp wider.

By comparison, spreads on CMOs (wider YTD) and MBS (little changed YTD), 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 (July) | Monthly, 5^th business day

SBA Prepay Commentary (July) | Monthly, 10^th business day

WSJ: U.S. Government-Bond Yields Drop as Trade Tensions Escalate

“Government-bond yields fell Monday to fresh 2019 lows after new trade tensions between the U.S. and China exacerbated concerns about slowing economic growth.”

Bloomberg: A Forever Trade War Looms as Trump Deepens Battle With China

“Investors are starting to grasp the potential for a protracted conflict. U.S. equities last week had their worst week of the year and were tumbling again Monday along with emerging-market currencies. Treasuries rallied with the yen and gold as traders bid up haven assets.”

Vining Sparks: Strategic Insight: Mid-Year Review | Time to Flip the Script?

“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?”

Sector Updates

Adjustable Rate Mortgage Market Update

Last week, yield spreads between hybrid ARMs and Treasurys were mixed with Ginnie 2s tightening approximately 3 to 5 basis points and conventionals widening approximately 1 or 2 basis points.

Agency Market Update

Spreads for both bullet and callable agencies widened with last week’s bond rally. Both 3- and 5-year bullets are trading right at the average of the past 3 years, but absolute yields are basically at the lowest level in nearly 2 years.

Fixed Rate Mortgage Market Update

Mortgages were largely able to keep pace with strengthening Treasury prices last week as yield spreads for current production coupon MBS to Treasurys remained stable. Although, there was some widening experienced in higher-coupon pools.

Municipal Market Update

Municipals prices were steady on Monday, stronger on Tuesday, steady again on Wednesday, and stronger again on Thursday and Friday. New issue offerings are forecasted to be $12.6B for the trading week.

SBA Market Update

Fixed-rate DCPC yield spreads versus Treasurys tightened 6 bps on the 25-year term, 5 bps on the 20-year term, and 4bps on the 10-year term. 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.

CMO Market Update

Last week, CMO spreads to Treasurys widened 5bps for 2-year paper. Spreads for intermediate and longer-term PACs and Sequentials were unchanged. This week, we review July activity with the Monthly Trade Summary.