Sector Update |  |
February 8, 2021
The Treasury curve finished last week markedly steeper with longer maturities increasing 10-14 bps and shorter maturities falling 1-2 bps. In terms of how we got there, the 10-year increased throughout the week as the likelihood of a larger stimulus package, passed on a party line vote, increased. Naturally, with all the fiscal and monetary policies in effect, inflation has been (and will continue to be) a much-discussed topic in 2021. Markets seem to have made their opinion known with longer yields increasing and the yield curve steepening. Yesterday (2/7), Treasury Secretary Janet Yellen said in regard to unwanted inflation, “The most important risk is that we leave workers and communities scarred by the pandemic and the economic toll that it’s taken.”
LIBOR and New York State’s Budget
A recent event to be aware of is a potential fix for contracts (corporate bonds and other securitizations are contracts) governed by New York state law that are currently tied to LIBOR. Some of these lack contractual language sufficient to facilitate a transfer in the event LIBOR no longer exists and would be difficult (at best) to modify after the fact. Here’s a Bloomberg article on the subject.
This Morning
Yields are +/- 2 bp of where they closed on Friday and major stock indices are 0.4% to 0.6% higher after putting in their best weekly performance since early November. In terms of scheduled economic releases and Fed appearances, it will be a quiet week.
Longer Maturities Moved Higher Last Week, Short-End Stuck, Curve Steepened
Yield Curve Shape – Asked last week, will it get any steeper? Answer, Yes
Food for Thought – MBS Prepayments Released Friday (2/5)
Please see the full Prepay Commentary Here
Big picture, prepayments declined but mortgage rates remain low – March and April will be interesting to watch
Speeds remain elevated though and newer vintages continue to ramp
Prepayment protection in “spec” pools still popular, 15-Year 2.5s of 2020 have approximately 90bps of rate incentive on average
Sector Commentary (click on links for more in-depth look)
- Government/Agency Space
- Bullets, spreads were unchanged on the week
- Spreads historically tight
- Callables, 3-5 year maturities up to 2 bps wider
- Callables, 10-15 year maturities 1-2 bps wider
- Last week, issuance $3.2 Billion — $6.1 Billion called
- Bullets, spreads were unchanged on the week
- Agency CMBS, MBS, and ARMs
- SBA DCPCs were unchanged on the week
- There is a fixed-rate auction this Thursday, expect strong demand
- January auction came at historically tight spreads
- Issue spread will be interesting to watch with benchmark yields higher
- Agency MBS spreads were wider last week 15-year +1 bps and 30-year +4 bps
- Freddie Mac PMMS shows mortgage rates remained relatively unchanged
- 30-year rate at 2.73 (unchanged from last week) | 15-year rate at 2.21 (+1 bp from last week)
- Agency CMOs spreads were unchanged for the week
- Relatively speaking, less spread tightening has increased activity here
- Cut-coupon CMOs remain popular
- SBA DCPCs were unchanged on the week
- Municipals – for the month of January
- BQ Munis, 5-year 5 bps tighter, 10-year 10 bps tighter, 15-year 19 bps tighter
- GM Munis, 5-year 4 bps tighter, 10-year 10 bps tighter, 15-year 12 bps tighter
- Taxable Munis, 5-year 11 bps tighter, 10-year 13 bps tighter, 11-year 23 bp tighter
- Corporates – unchanged on the week
- YTD A-Rated Corporates – 2-year 1 bp tighter, 5-year 4 bps tighter, 10-year 3 bps tighter
- Vining Sparks Interest Rate Products
- Commercial loan hedging continues to be in spotlight
- Borrowers demanding long term fixed rates
- More bankers discussing alternatives to control interest rate risk
- Primary key to success is meeting customer demand by offering structures they desire
- Commercial loan hedging continues to be in spotlight
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
WSJ: Covid-19’s Hit to State and Local Revenues Is Smaller Than Many Feared
“In the end, state revenues fell 1.6% in fiscal year 2020 and were 3.4% lower than projected before the pandemic, according to the National Association of State Budget Officers. While states expect revenues to decline 4.4% in fiscal 2021, which ends on June 30 for most, 18 states are seeing revenues come in above forecast.”
Vining Sparks: MBS & Prepayment Update: Volatile 2020 Comes to an End
Last year was one for the records in the mortgage market. This presentation looks back over 2020 at what happened and how different prepay models performed over the year. Some did better than others. It is always important, but especially in this environment, that robust prepayment assumptions are used. We also make note that Bloomberg is releasing a model update and provide some background and comparisons.
Vining Sparks: Coronavirus Chartbook