January 13, 2020
Treasury yields ended last week modestly higher, increasing by 3 to 4 basis points for maturities of 2 to 10 years. A flight to quality following news of an Iranian missile strike sent yields plunging Tuesday night, but by the time the market opened on Wednesday Treasury yields had recovered as the market’s fears of a prolonged conflict with Iran eased. So far today, yields are 2-4 bps higher from where they closed on Friday.
Food for Thought
When reviewing 2019 and what performed best over the year, one theme that sticks out is that long-duration out-performed short duration. Intuitively, this make sense as 2019 was marked by falling interest rates, nearly parallel on maturities 3-years and longer. Also interesting to this author, long-duration out-performing in 2019 was a 180-degree turn from the prior year, 2018, in which short-term investments had a better run as the yield curve flattened and interest rates increased. Summarized returns (price appreciation/depreciation + yield + reinvestment) are estimated below and assume a given Treasury maturity is bought and held for a calendar year.
Weekly Spread Commentary
- 2s to 10s declined 1 bp to 25.
- Agency Bullets were flat, save the 5-year which managed to tighten 1 bp.
- Agency Callables were 3 bps tighter.
- MBS were tighter, both the 15- and 30-year were 5 bps tighter.
- CMOs were 1-3 bps tighter.
- Corporates tightened 3 bps across the curve.
- BQ Munis were 4-10 bps tighter.
- GM Munis were 10-16 bps tighter.
- Taxable Munis were 7 bps tighter at the 5-year and 2-3 bps wider on longer maturities.
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 (December) | Monthly, 10th business day
“Congress created the maturity issue when it let borrowers tie their payments to their income. The program, known as income-based repayment, began in 2009. The program capped federal student loans’ monthly payments at 15% of discretionary income, which meant some loans wouldn’t be paid off when the securities they backed came due.”
Adjustable Rate Mortgage Market Update
Last week, hybrid ARM spreads continued their move tighter as 5/1s, 7/1, and 10/1s tightened 15, 10, and 4 bps, respectively. Since the rally at the end of 2018, ARM pricing spreads have widened significantly, reacting strongly to each move lower in rates. For example, 5/1 ARMs have a 45 bp spread, almost 17 bps wider than they were in mid-February. Longer-reset 7/1s and 10/1s have a 52 and 60 bp spread, respectively, approximately 14 and 10 bps wider than levels in mid-February.Continue Reading
Agency Market Update
Agency bullet spreads continued to grind tighter, and 5-year bullets tightened by 1 basis point to 5. As mentioned in recent weeks, agency bullets remain ideal sale candidates given how tight spreads are.Continue Reading
Fixed Rate Mortgage Market Update
The mortgage-backed securities market had its best annual performance in more than a decade last year and investors have increasingly turned to this market for yield in recent months. While yield spreads are off their highs from August due to strong demand, mortgage valuations are still reasonably attractive compared to levels observed in recent years.Continue Reading
Municipal Market Update
Municipal prices started the week mixed, strengthened on Tuesday, and were mixed daily for the rest of the week. New-issue offerings are forecasted to be $6.64B for the trading week.Continue Reading
SBA Market Update
For the sixth consecutive month, fixed-rate DCPC issuance in the 25-year term exceeded the 20-year term. Issuance for the 25-year term totaled $207.2M in January (largest monthly issuance ever for the 25-year term), while the 20-year term totaled only $113.4M. Total issuance in the January auction of $330.8M declined $12M (-3.5%) compared to December issuance of $342.8M. With the Fed likely on hold for the foreseeable future and the curve steepening, floating-rate bonds may see a pickup in activity as part of barbell portfolio strategies.Continue Reading
CMO Market Update
CMO spreads to Treasurys tightened 1-3 basis points last week. We saw consistent widening in the first half of 2019, with spreads reaching highs for the year in the 3rd or 4th quarter depending on class type and maturity. Levels were steadier to end the year and, overall, bonds are still trading in the same range.Continue Reading