Sector Update

December 16, 2019



If we only looked at how last week started and ended, the volatility of the week gets washed away. If, on the other hand, we consider the week day-by-day, we see a different story. Of note, the Fed doubled down on its October pause, U.K. Prime Minister Johnson gained a better-than-expected majority in parliamentary elections helping Brexit move ahead, and the U.S. and China announced a phase-one trade deal that avoided new tariffs taking effect yesterday. So far this morning, treasury yields are 4-6 bps higher, but still below where they peaked last week on Friday.

 

Food for Thought

It’s no secret that as interest rates dropped this year, investors have had increasing amounts of bonds called. This week I wanted to take a quick look at a group of FHLB bonds that have been called over the next five business days. There is a current Treasury curve for reference, and I’ve plotted the remaining maturity of the bonds called along the curve.

A key takeaway for agency callable investors, I think, is any bond with a coupon of 2.00% or greater and a remaining maturity of 10 years or less is a prime candidate to be called if it has not already. The uncertainty of whether bonds will be called or not can be challenging for portfolio managers; however, it is not impossible. If it would be helpful to have a report of the predicted call dates for your Agency Callable portfolio, please reach out to either your account representative or myself.



Weekly Spread Commentary



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 (December) | Monthly, 5th business day

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

 

WSJ: Fed’s Control Over Rates Tested by Growing U.S. Budget Deficits

“Budget deficits that are projected to rise for years are straining the plumbing of the U.S. financial system, making it harder for the Federal Reserve to manage the interest rates that influence how much consumers and businesses pay to borrow.”


Bloomberg: Fuzzy Math That Fueled Junk Debt Boom Is Sparking Jitters

“Ever-increasing adjustments to Ebitda, a key earnings measure, may be painting an overly optimistic picture of corporate America’s financial strength.”

 

Sector Updates


Adjustable Rate Mortgage Market Update

There was increased demand for new-issue hybrid ARMs last week, which caused yield spreads to Treasurys to tighten a basis point or two.  Hybrid ARMs outperformed shorter mortgage-related sectors with 15-year fixed-rate mortgage spreads unchanged.  On the contrary, ARMs underperformed 30-year fixed-rate mortgages, which tightened 3 bps on the week.

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Agency Market Update

After having moved very little in recent months, last week bullets tightened in versus government debt. Callables were mostly unchanged last week and spreads still appear relatively tight given the fact that callables are trading near the tightest levels since early to mid-2018 for most terms and call structures.

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Fixed Rate Mortgage Market Update

Yield spreads for current-coupon MBS to comparable Treasurys were relatively stable last week, as 15-year held firm at 64 bps and 30-year tightened by 3 bps to 95 bps.

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Municipal Market Update

Municipal prices were stronger on Monday and Tuesday, and were mixed on a daily basis for the rest of the week. New-issue offerings are forecasted to be $6.0B for the trading week.

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SBA Market Update

With the Fed likely on hold for the foreseeable future after another 25 bp rate cut, floating rate bonds may see a pickup in activity as part of barbell portfolio strategies. Fixed-rate SBA DCPC pools and SBIC debentures remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.

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CMO Market Update

With everything that has taken place this year, from Fed rate cuts and falling Treasury yields to widening CMO spreads, I thought it would be worthwhile to examine what investors can expect from this sector as 2019 winds down. To that end, we reintroduce “Structure Highlights”.

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