January 21, 2020
Treasury yields bounced up and down last week but finished the week relatively unchanged. Last week markets reacted to softer inflation than expected coupled with a long-waited-for signing of a phase-one trade deal with China and strong housing and employment reports. Iran appears to have lost a place of prominence in headlines as tensions seem to have cooled, for now. It is also worth noting, although it largely flew under the radar, that the Senate passed the USMCA (United States-Mexico-Canada) trade agreement Thursday by a wide margin and is expected that President Trump will sign it this Wednesday. Noteworthy today, President Trump’s impeachment trial is slated to begin at 1 p.m. ET. As it stands, so far today, yields are 2-5 bps lower from where they closed on Friday. This largely appears due to the growing fears of a virus, many are comparing to SARs, spreading in China and throughout the region.
Food for Thought
Last week in the Food for Thought section, we observed that longer-duration outperformed shorter-duration as interest rates fell during 2019. Naturally, with rates falling, an investor should also expect that less negatively-convex bonds, those with “locked out” cashflows, longer calls, lower-coupon mortgages, etc to have performed better as well.
Using straight pass-thru MBS as examples, we can plainly observe price increases as well as historical returns were greater for lower coupons no matter the term during 2019. In terms of looking forward, Treasury yields are currently 10-15 bps lower than they ended the year. If rates stay moderately rangebound, as well as prepayments, then 2020 again favors low- to moderate-premium MBS.
Weekly Spread Commentary
- 2s to 10s increased 1 bp to 26.
- Agency Bullets were flat on the week.
- Agency Callables were unchanged save long maturities tightened by 1 bp.
- MBS were wider, both the 15- and 30-year were 1 bp wider.
- CMOs were 2-5 bps tighter.
- Corporates tightened 4 bps across the curve, save longer maturities were unchanged.
- BQ Munis were 5-7 bps tighter.
- GM Munis were +/- 1 bp across the curve.
- Taxable Munis were tighter by 2-9 bps, have tightened significantly since Year-End.
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
“The Treasury also said last year it was once again exploring the possibility of issuing debt with maturities beyond 30 years, after considering and then dropping the idea in 2017. But bond dealers showed little interest in the idea. Offering a 20-year bond would be a reintroduction of a security last issued in March 1986.”
“Mounting fears about the deadly virus rocked financial markets, with Asia stocks slumping over the likely hit to retail and tourism during what should have been a peak period for spending. The FTSE China A50 Index of large caps Tuesday logged its biggest drop in six months.”
Adjustable Rate Mortgage Market Update
In response to the increased level of supply from originations, yield spreads on hybrid ARMs to Treasurys moved wider as 5/1s, 7/1s, and 10/1s widened 5, 12, and 2 bps, respectively. Last week, the ARM origination cycle saw levels not seen since July 2019, with 434.5mm in new issue ARM selling split amongst Fannie Mae (285.6mm), Freddie Mac (136.8mm), and Ginnie Mae (12.1mm).Continue Reading
Agency Market Update
Agency bullet spreads were mostly unchanged last week and remain extremely tight compared to historical averages. Callable spreads were mostly unchanged last week, with modest tightening on the longer end of the curve.Continue Reading
Fixed Rate Mortgage Market Update
Buying was focused on 15- and 20-year passthroughs with lower-dollar prices and coupons. Activity in 15-year pools was centered around seasoned 2.5s and newer production 2.5s and 3.0s, while the focus in 20-year pools was in 2.5s & 3.0s.Continue Reading
Municipal Market Update
Municipal prices started the week unchanged, strengthened on Tuesday, were mixed on Wednesday and Thursday, and steady on Friday. New-issue offerings are forecasted to be $7.12B for the trading week.Continue Reading
SBA Market Update
SBA floating pools with uncapped quarterly resets indexed to Prime offer attractive yield opportunities compared to 3-month T-Bills and Fed Funds. 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.Continue Reading
CMO Market Update
As mentioned in recent Sector Updates, Agency CMO spreads to Treasurys widened meaningfully in 2019. Among products we trade and monitor, the CMO and MBS sectors were, generally speaking, the only ones to improve last year in relative value on a nominal spread basis. And while CMO spreads have tightened marginally over the first few weeks of 2020, the space still looks attractive.Continue Reading