Sector Update

February 10, 2020

Last week, markets seemingly shrugged of the Coronavirus as Treasury yields ended up across the curve, credit spreads largely tightened, and the S&P 500 hit an all-time high on Thursday and ended the week up 3.17%. This should be filed under the heading “don’t borrow trouble” but hitting the headlines this morning, the U.S. Justice Department has indicted 4 Chinese military officials in the 2017 Equifax data theft. If you recall, this resulted in the loss of personal information to the tune of 145 Million people, mostly in the United States.

This week, we have Fed Chair Powell scheduled to address the House on Tuesday and the Senate on Wednesday. Certainly, he will be questioned on the affect the Coronavirus is having and could have on world economies and what the Fed plans to do to address these concerns. On the economic front, we have CPI and Jobless Claims reports out on Thursday and on Friday we get Retail Sales. So far this morning, Treasury yields are 2 bps lower from where they closed on Friday.

Food for Thought

A snippet from the most recent Vining Sparks Loan Trading Auto Performance Update.

Given the independent correlation of delinquency rate with FICO and LTV we have highlighted in previous write ups, we combined the data sets to investigate whether the layering of these risk factors leads to elevated levels of delinquency. The overall delinquency rates are strongly inversely-correlated to credit score, and positively-correlated with LTV levels. It is interesting to note that LTV bands above 110 have higher than average delinquency rates in every FICO bucket. Lower credit scores intuitively lead to higher delinquency rates, but this finding emphasizes the importance of controlling exposure to high LTV loans regardless of the borrower’s credit score. The largest changes continue to occur in the 640 – 680 bucket, but the “Stair-step” is evident in each bucket and these differences can become more magnified in the higher credit buckets where there is a smaller loss allocation built into margins.

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 (February) | Monthly, 5th business day

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


Vining Sparks: Strategic Insight: Transitioning from LIBOR – Latest Developments and Planning Steps

“The transition away from LIBOR is rapidly picking up momentum. Virtually all financial institutions will be impacted. Announcements from the ARRC and ISDA should be closely monitored for application to your specific situation.”

Vining Sparks: Strategic Insight: Fannie, Freddie Announce Single-Family and Multifamily ARM Index Update

“As you are well aware of by now, the transition away from LIBOR is in full-swing and building momentum as we approach the assumed 2021 deadline. As part of this transition, both Fannie Mae and Freddie Mac announced yesterday additional measures they will take as they transition away from LIBOR.”

Vining Sparks: Loan Trading: Auto Performance Update

“We continue to be very active in trading auto loan participations and analyzing loan portfolio compositions. We receive monthly performance reports on over $2.7B of auto balances, monitor more than 140 pools, and have over 6 years of performance information on our most seasoned pools. We continue to track the performance of individual pools and seller specific performance as well as consolidated analytics to determine any trends or risk factors occurring in the auto space”


Sector Updates

Adjustable Rate Mortgage Market Update

Yield spreads on hybrid ARMs to Treasurys tightened 3 to 6 basis points last week, which was the result of a bond market sell-off that sent yields higher across the curve.

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Agency Market Update

Agency bullets steadily tightened from mid-2019 but in recent weeks spreads have moved a couple of basis points wider and are now at the widest levels since September. Callable agencies mostly tightened last week after widening out in previous weeks.

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Fixed Rate Mortgage Market Update

Nominal spreads compared to Treasurys were mixed last week, with 15-year tightening 3 bps to 57 bps and 30-year widening 3 bps to 95 bps.  Valuations continue to be attractive in the mortgage space, especially for 15- and 20-year pools.

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Municipal Market Update

Municipal prices started the week steady, were weaker on Tuesday and Wednesday, were steady on Thursday, and mixed again on Friday. New-issue offerings are forecasted to be $8.33B for the trading week.

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SBA Market Update

Yield spreads remain tighter on fixed-rate DCPC pools than the twelve-month average for the 20-year and 25-year terms. Spreads tightened 2 bps month over month; 54 bps yield spread for the 25-year term and 41 bps for the 20-year term. February prepayment speeds for SBA floating-rate pools will be released later this week.

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CMO Market Update

CMO spreads to Treasury yields tightened 2 basis points last week. For perspective, CMO yields are near lows since the beginning of 2019, and yet spreads are within 10-15 basis points of their highs over the same period. Depending on class type and WAL, investors can find 60-80 basis points worth of spread in this sector.

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