Draft: June 22, 2020
Last week was less volatile than the previous two with yields trading in a narrow band of approximately +/- 5 bps and closed the week virtually unchanged to down 1-2 bps. The news last week seemed to echo the sentiment from the Fed’s latest meeting which was rather dour in my opinion. A long, and perhaps stumbling recovery is expected. We continue to see rapid increases in positive COVID-19 tests, especially in certain states where initial reopenings are well underway. Having recently visited one of these states, here are my personal observations. I was surprised by the lack of masks being worn and seemingly non-existent social distancing measures. Those wearing masks and trying to practice social distancing were few and far between. Not that a “second-wave” wasn’t already expected, but after my very limited sample size observations, I think it a near certainty.
Spreads were mixed last week but the trend is still tilted towards tighter. That being said, nearly every spread we monitor below is wider than they were at the beginning of 2020. Overall, I think it likely for spreads to continue tightening if or until something meaningfully changes investor expectations and/or the Fed takes their foot of the gas (unlikely). There will certainly be pockets of wider spreads, for example higher coupon MBS, as investors continue to monitor and digest prepayment expectations versus reality.
So far this morning, U.S. stock indices are up slightly and the yield curve is 1-2 bps flatter. From a yield perspective, Treasury bills are unchanged while maturities 2 year and longer and down 1-2 bps.
Adjustable Rate Mortgage Market Update
On the week, yield spreads on Ginnie and conventional ARMs were unchanged while fixed-rate mortgages widened 9 to 11 basis points. Mortgages have struggled to keep up with other risk assets recently due to heavy TBA mortgage supply during the peak summer home buying season.
Agency Market Update
Agency bullet spreads mostly tightened last week, particularly in the 2- to 3-year part of the curve. Agency callables also tightened but mostly in the 5- to 10-year section of the yield curve.
Fixed Rate Mortgage Market Update
Nominal spreads for production MBS to Treasurys were wider on a week-over-week basis. 15-year widened 11 bps to 79 bps and 30-year widened 9 bps to 114 bps. The widening was more prevalent in higher coupons, as investors continue to have concerns about prepayments.
Municipal Market Update
Municipal prices started the week steady, weakened on Tuesday, were mixed on Wednesday, and steady on Thursday and Friday. New-issue offerings are forecasted to be $5.8B for the trading week.
SBA Market Update
Current yield spreads in SBA DCPCs tightened 10 bps last week to 70 bps over Treasurys. Spreads have tightened 25 bps over the last month, but spreads remain wide compared to historical levels.
CMO Market Update
Spreads to Treasury yields for fixed-rate CMOs continue to grind tighter, shaving 2 basis points last week, but remain wider by 10-20 basis points year-to-date. In terms of activity, short, lower-coupon front sequentials consistently generate interest from investors. More specifically, many customers are seeking 2.0% or lower cuts, with some going as low as 1.25%.
What We’re Reading
|Market Today||Weekly Recap||Brokered Deposit Rate Indications|
|Investment Alternatives Matrix||MBS Prepay Commentary||SBA Prepay Commentary|
Market Today | Daily
Weekly Recap | Weekly, Friday
Brokered Deposit Rate Indications | Weekly, Monday
Investment Alternatives Matrix | Weekly, Tuesday
MBS Prepay Commentary (June) | Monthly, 5th business day
SBA Prepay Commentary (June) | Monthly, 10th business day
“These numbers are based on closed sales, representing contracts signed in March and April. Given that those months saw the worst of the economic shutdown from the coronavirus, it is not surprising that the volume came in so low.”
Vining Sparks: Coronavirus Chartbooks
PDF/Mobile: Coronavirus Chartbook (PDF)
SBA PPP Links
PPP Lending Facility (PPPLF)
Federal Reserve 6/10: Update on Outstanding Lending Facilities (PDF)
Federal Reserve 6/10: PPPLF Transaction-specific Disclosures (Excel)
Federal Reserve: PPPLF Webpage (includes Term Sheet + FAQs)
OCC: 6/22 Assessments: Interim Final Rule
Federal Reserve: 6/8 Expands MSLP to allow more small and medium-sized businesses to receive support
Federal Reserve: 6/3 Announces expansion in number and type of entities eligible to directly use its MLF
LIBOR Transition Links
ARRC 4/17: ARRC Announces Its Key Objectives for 2020
Fannie Mae: LIBOR Transition Webpage
Freddie Mac: LIBOR Transition Webpage