Sector Update

February 3, 2020



As fears and realities of the Coronavirus rippled through markets last week, Treasury yields again declined sharply. Maturities from 2- to 10-years declined 18-20 bps. We also saw the yield curve invert again. Some specific events driving market reactions last week were a growing infection rate, Hong Kong restricting travel to China, the CDC confirming the first human-to-human transfer of the Coronavirus in the United States, the State Department effectively saying “Do Not Travel to China”, and to round off the week, Delta, United, and American airlines canceled all routes between the U.S. and China through at least March.

One of the more interesting moves last week was the difference between 3-month T-Bills and 2-Year Treasurys which declined to -23 bps last week. Three-month yields are virtually anchored to current short-term rates administered by the Fed. On the other hand, two-year Treasury yields, among other things, have expected future Fed moves in mind. The narrowing of the gap between the 3m-2y indicates market participants expect a short-term rate cut sooner than later, regardless of what the Fed says.


Food for Thought

This is a bit of a rehash from last week, but it bears repeating again due to activity we are seeing. In the month of January, we saw more investment portfolio repositioning than in any point in recent history since the Tax Cuts and Jobs Act of 2017 was passed. Given the rally, many are centered around taking gains. While there are many reasons portfolio managers look at transitioning from one group of bonds into another, there are only so many levers one can pull to make a swap successful. I define “successful” as generating more income through the effective life of what is being sold. Simply put, “Am I better off selling this group of bonds today and reinvesting, or should I let the bonds paydown/mature and invest incrementally?” Below, I have summarized my take on creating a successful swap with the starting point being whether a loss, gain, or breakeven is established.



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 (January) | 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.”


WSJ: Saudis Weigh Large Oil Cuts in Response to Coronavirus

“OPEC and its allies are split over how to manage oil supply in the face of the deadly coronavirus, which has already eroded demand in China. Collective responses by oil producers tend to be more efficient in supporting crude prices, which have lost 15% in the past month.”


CBS Sports: 2020 Super Bowl Commercials

“Getting a commercial on Super Bowl Sunday comes at quite the cost so companies bring out their best ideas, concepts and jokes for their spot during the game. Here are some of the top commercials from the 54th Super Bowl:”

 

Sector Updates


Adjustable Rate Mortgage Market Update

Last week, demand for new-issue hybrid ARMs slowed, which resulted in yield spreads to Treasurys widening 3 to 6 basis points.  Z-spreads were wider for GNMA, FNMA, and FHLMC products as well (see table below).  ARMs slightly underperformed mortgage-related sectors with 15- and 30-year fixed-rate mortgages widening 5 basis points on the week.

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Agency Market Update

Agency bullet spreads remain tight but are trading marginally wider than levels from two weeks ago.  Callable agencies also widened last week.

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Fixed Rate Mortgage Market Update

Mortgages couldn’t keep pace with the strong Treasury market rally last week, as nominal spreads to comparable Treasurys for both 15- and 30-year widened 5 bps to 60 bps and 93 bps, respectively.

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Municipal Market Update

Municipal prices started the week stronger, were steady on Tuesday and Wednesday, mixed on Thursday and steady again on Friday. New-issue offerings are forecasted to be $7.06B for the trading week.

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SBA Market Update

SBA floating-rate pools currently offer attractive yield opportunities compared to 3-month T-Bills and Fed Funds and offer similar or higher yields than longer-duration fixed-rate bonds, driven by the bond rally, spread tightening in other product sectors and flattening of the yield curve over the last several weeks. 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.

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CMO Market Update

Customer preferences usually create some stability when it comes to analytics on CMO trades, and that was the case again in January. Typical metrics, such as yield, WAL, duration, and convexity, were right in line with previous months.

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