Sector Update

December 2, 2019

Last week was ho-hum with yields ending approximately where they started. For a quick recap of the holiday-shortened week, click here. The real excitement is this morning, so far today, the yield curve is steeper with yields on maturities ranging from 2-10 years up by 2-7 bps. These moves are largely in response to better-than-expected economic data out of China along with leadership changes in Germany’s SPD (Social Democratic Party). Potentially shaking up a coalition historically tied to conservative fiscal policy.


Food for Thought

For the past two weeks, we looked at sectors with historically-wide spreads. Specifically, Taxable Munis and 15-Year MBS. However, with year-end quickly approaching and balance sheet managers looking for positions to sell, I want to mention a sector where spreads are historically tight; General Market (GM) Municipals.

Taxes complicate spread comparisons when looking at Tax-Free Municipals. Frankly, it would be easy to just ignore taxes, and many do, but the tax benefit is a (if not the) main draw to these bonds, so I chose to include taxes when considering spreads.

Since we are looking at where spreads are tight from a disposition standpoint, I charted historical spreads of a 10-Year maturity GM Municipal bond using a 34% tax-rate. I chose 34% to consider spread from the “next buyer’s” standpoint, which for a GM Muni, is more than likely an individual, with a higher tax-rate than a corporate entity.

If you take notice below, looking back over a 3-year time frame, spreads have bounced back from a recent low, but remain below the -1 Standard Deviation boundary. If you are looking for bonds to sell out of your portfolio, General Market Municipal bonds are not a bad place to start. In this instance, sooner is better than later as spreads may snap back with upcoming issuance.

*Assumes a 34% tax rate

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 (November) | Monthly, 5th business day

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


WSJ: Why You Shouldn’t Expect Rates to Head Upward for a While

“Fed officials raised rates four times last year largely because they expected solid U.S. economic growth and falling unemployment to lift inflation above their 2% target or higher, after it fell short for most of the past decade.”


Sector Updates

Adjustable Rate Mortgage Market Update

ARM spreads tightened 6 to 13 basis points in November, outperforming fixed-rate MBS, which tightened at a much less aggressive rate.

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Agency Market Update

Bullets continue to trade near the tightest spreads since May. Callables still appear to be relatively rich—some callable paper has tightened by 30 basis points or more in only a matter of months.

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Fixed Rate Mortgage Market Update

Yield spreads for current coupon MBS to comparable Treasurys held relatively firm last week as the broader market continued to trade in a tight range. Both 15- and 30-year MBS tightened by 1 bp to 65 bps and 99 bps, respectively.

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Municipal Market Update

Municipal prices started the week steady, were stronger on Tuesday, and Steady on Wednesday and Friday. New-issue offerings are forecasted to be $17.4B for the trading week.

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SBA Market Update

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. 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.

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CMO Market Update

CMO spreads to Treasury yields were unchanged for the second week in a row. Spreads were steady month-over-month, ending November within a basis point or two from where they started.

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