February 18, 2020
Overall last week, markets continued to shrug of the Coronavirus, now more specifically referred to as COVID-19, as Treasury yields ended relatively flat to the prior week, credit spreads largely tightened again, and the S&P 500 hit another new all-time high on Friday and ended the week up 1.58%. Meanwhile, it has been hard to find information that is encouraging regarding the COVID-19 virus. If you would like to look, our Economics team is maintaining a Coronavirus Chartbook. As markets react to less-than-favorable news, especially Apple specifically naming COVID-19 in an earnings miss, equities are trading lower and Treasury yields are 2 bps lower from where they closed on Friday.
The WSJ recently wrote an article that caught my attention, “The Bond Market Might Finally Be Nearing Its Limit”. A scenario is laid out where bonds may not provide as much protection to investors as yields hit a sort of natural yield floor. This natural floor, previously assumed as a 0% yield, but now presumed to be -1.0% as negative debt yields can be observed today and have been for quite some time now. I have my own opinion, but I will let you be the judge once we consider a little math. For example, even if we assumed 0% yields were as low as they could go in the United States, a 10-Year Treasury still has 15.6% potential price appreciation; and, a 30-Year Treasury has 60% potential price appreciation. Furthermore, if we accept -1.0% is the bottom for yields in the United States, the same 10- and 30-year Treasury have 27% and 106% potential, respectively, for price appreciation. Seems like a lot of room to run to me, but I’m interested to know what you all think.
Food for Thought
We have two webinars scheduled this week, both offering CPE credit for those getting a head start in 2020. Please use the links below to register. If you cannot attend in person, replays will be posted approximately 24-hours afterwards.
Bank Audience: Today (2/18) at 10:00 A.M. CST, Closed for registration, replay will be posted online.
Credit Union Audience: Thursday (2/20) at 10 A.M. CST, Positioning the Investment Portfolio for Performance.
Below is a slide from the Bank webinar scheduled for today. It is interesting, and intuitive, that after tax-reform was passed in 2017 we saw overall bank allocations to Municipal securities decline. The trend has recently reversed though, in part because of the relative value many portfolio managers saw (and continue to see) in taxable Municipal bonds.
Weekly Spread Commentary
- 2s to 10s was 2 bps tighter.
- Agency Bullets relatively flat, +1 bp on short- and long-end.
- Agency Callables flat, save + 1-3 bps on long maturities.
- MBS were mixed, the 15-year widened by 3 bps and the 30-year was unchanged.
- CMOs were unchanged across the board.
- Corporates were 3-4 bps tighter.
- BQ Munis tighter on 5- to 10-year maturities. 15-year was unchanged.
- GM Munis tightened by 20 bps at 5- and 10-year maturities. 15-year was unchanged.
- Taxable Munis tightened by 1-5 bps across the curve.
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 (February) | Monthly, 10th business day
“There is some sense to this: In theory, there must be some limit to how negative yields can go. As yields fall (and so prices rise), potential future gains are capped by that boundary, while potential losses from higher yields remain the same.”
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.”
“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.”
“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.”
Adjustable Rate Mortgage Market Update
Yield spreads between hybrid ARMs and Treasurys were mixed with 5/1s tightening 2 basis points while longer-reset 10/1s widened 3 basis points. Z-spreads were generally tighter for GNMA, FNMA, and FHLMC products.Continue Reading
Agency Market Update
Agency bullets continued to widen last week and are now trading at much more palatable yields compared to how they were trading at the beginning of the year. Bullet spreads across the curve are largely on top of the 12-month average but were within striking distance of all-time tight spreads at the beginning of the year. Callable agencies were mostly unchanged but widened somewhat on the longer end of the curve.Continue Reading
Fixed Rate Mortgage Market Update
Nominal spreads on current coupon MBS compared to Treasurys were mixed last week, with 15-year widening 3 bps to 60 bps and 30-year holding steady at 95 bps. Z-spreads on 15-year 2.5s have improved in recent weeks and look relatively attractive, having risen to 60 bps from a low of 46 bps near the beginning of the year.Continue Reading
Municipal Market Update
Municipal prices were steady on Monday and Tuesday, mixed on Wednesday, steady again on Thursday and mixed again on Friday. New-issue offerings are forecasted to be $5.24B for the trading week.Continue Reading
SBA Market Update
SBA floating-rate pools with uncapped quarterly resets indexed to Prime experienced a continued pickup in activity over the last month with the majority of the activity in higher coupon 10-year equipment pools priced at moderate premiums. Yield spreads remain tighter 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.Continue Reading
CMO Market Update
CMO spreads to Treasury yields were unchanged last week and have tightened 5 to 8 basis points year-to-date. Spreads for 3, 5, and 10-year PACs and Sequentials remain at their respective 1-year averages. Considering 3 years of history, however, suggests there is additional value in this space.Continue Reading