December 9, 2019
The yield curve steepened last week, pivoting around the 2-year. Shorter maturities declined in yield by 4-6 bps while yields on maturities 3 years and longer increased by 3-7 bps. Curve steepness, measured by the 2s-10s, finished out the week at +22 bps (currently at +20 bps this morning). To put this in context, the high for 2s-10s this year is +28 bps, which was achieved shortly before the curve flattened sharply over the course of two months bottoming out at -5 bps.
Food for Thought
As prepayments increased during 2019, many investors, depositories in specific, sought refuge in 15-Year 2% MBS at discount prices. Unlike MBS at premium prices, yields on discount-priced MBS, are enhanced by prepayments. Given the increase in activity we have seen in 15-Year 2% MBS, I thought it would be interesting to look at prepayments broken down by state.
A helpful number to keep in mind is that the national 3-month average is 9.1 CPR. Of interest, the three fastest states are Montana (15.5), Oklahoma (15.0), and New Mexico (14.5); and, the three slowest payers are Vermont (4.0), Hawaii (4.6), and the District of Columbia (5.4).
*Assumes a 34% tax rate
Weekly Spread Commentary
- 2s to 10s slope 5 bps wider to 22 bps.
- Agency Bullets unchanged on the week, remain near lows of the year.
- Agency Callables tightened 1-3 bps.
- MBS were tighter, 15- and 30-year MBS both tightened by 1 bps.
- CMOs were 1 bp tighter on intermediate and long maturities.
- Corporates were virtually unchanged, spreads are at lows of the year.
- BQ Munis were 3-14 bps tighter, spreads are at/near average of the year.
- GM Munis were 7-12 bps tighter, spreads are at/near lows of the year.
- Taxable Munis were 3-7 bps wider, spreads are at/near highs of the year.
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 (November) | Monthly, 10th business day
“What’s less appreciated is that the unconventional tools the Fed deployed to stimulate the economy after the 2008 financial crisis—bond purchases and so-called forward guidance about its plans to hold interest rates at very low levels for much longer than investors expected—probably won’t have the same power to spur growth in another downturn.”
“In an oral history with the Fed, Volcker explained “why I probably don’t like inflation.” It was 1945. He was 18 at the time, going off to college at Princeton.”
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. ARM spreads tightened 1 to 2 basis points month-over-month, outperforming fixed-rate MBS, which widened 2 to 3 basis points. Week over week, Z-spreads were mixed for GNMA, FNMA, and FHLMC products.Continue Reading
Agency Market Update
Bullet spreads have changed very little since the beginning of October and continue to trade near the tightest spreads since May. Most callable paper has appeared relatively rich for more than a month now, and last week callables tightened further versus Treasurys.Continue Reading
Fixed Rate Mortgage Market Update
Yield spreads for current-coupon MBS to comparable Treasurys held relatively stable, as 15- and 30-year MBS tightened by 1 bp to 64 bps and 98 bps, respectively.Continue Reading
Municipal Market Update
Municipal prices weakened to start the week, were stronger on Tuesday, steady on Wednesday, mixed on Thursday and weaker on Friday. New-issue offerings are forecasted to be $13.21B for the trading week.Continue Reading
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.Continue Reading
CMO Market Update
Generally speaking, spreads have been very steady in the second half of 2019. We haven’t seen a week-over-week change greater than 5 basis points since July, and spreads remain within 5-7 basis points of where they ended the second quarter.Continue Reading