Sector Update

January 25, 2020

Last week was a relatively calm week for Treasury yields as the shorter end declined and the longer end increased. One explanation for a yield curve move like this, called a bear steepener, which has been the trend so far this year – is the increased expectations for inflation. It is interesting then, this morning, that we are seeing a reversal of last week and then some. More details below.

LIBOR and New York State’s Budget

One event that might have flown under the radar last week was a potential fix for contracts (corporate bonds and other securitizations are contracts) governed by New York state law that are currently tied to LIBOR and lack contractual language sufficient to facilitate a transfer in the event LIBOR no longer exists. This is a big deal as some contracts, take a corporate bond for example, might actually effectively convert to a fixed rate absent a legislative solution like is being proposed. Here’s a Bloomberg article on the subject.

This Morning

Yields and stocks are slipping so far today. Part of this is likely due to what is looking like a declining likelihood of passage of a blockbuster stimulus bill. Of other concern, perhaps weighing on markets this morning is that Moderna is speeding up work on a booster to its vaccine to account for newer variants of COVID-19. I think this puts a damper on expectations of a quick vaccination campaign and a return to “normal”. If this type of expectation continues and/or gains more traction – longer yields may slump and the curve flatten.

Treasury Yields Jump Higher to Start 2021 – Calm Past Two Weeks

Yield Curve Shape – Long-end increases, Short-end held down by Fed

Sector Commentary (click on links for more in-depth look)

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: 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.

Bloomberg: Libor Overhaul Gets Boost in Cuomo Bid to Avert Transition Chaos

“Provisions to help troublesome Libor-linked contracts switch to replacement rates are contained in Cuomo’s state budget plan, which was published on Tuesday. Bankers, investors and regulators see such proposals as crucial to ensuring that a large swath of the global financial system isn’t disrupted.”

Vining Sparks: Coronavirus Chartbook

Regulatory Links

FDIC: 1/19 FDIC Approves Rule on the Role of Supervisory Guidance

Treasury: 1/8 SBA and Treasury Announce PPP Re-Opening; Issue New Guidance

FHFA: 12/23 FHFA Extends COVID-19 Multifamily Forbearance through 3/31/2021

Federal Reserve: 12/16 Federal Reserve issues FOMC statement

FDIC: 12/15 Combined Final Rule on Brokered Deposits and Interest Rate Restrictions (FIL-103-20)

FHFA: 12/10 FHFA Further Extends COVID-Related Loan Flexibilities

FHFA: 12/1 FHFA Extends Foreclosure and REO Eviction Moratoriums

Federal Reserve: 11/30 Statement on LIBOR Transition

Treasury: 11/30 Treasury and FRB Announce Extension of Four Lending Facilities Until 3/31/2021

Federal Reserve: 11/25 Minutes of the Federal Open Market Committee, November 4-5, 2020

FDIC: 11/20 Agencies Provide Temporary Relief to Community Banking Organizations

FHFA: 11/18 FHFA Announces Final Capital Rule for the Enterprises

LIBOR Transition Links

ARRC 12/18: FAQs — Updated 12/18/2020

ARRC 12/4: ARRC Releases Guide and Highlights New ISDA Webinar on USD LIBOR Endgame Developments

ARRC 11/30: ARRC Applauds Major Milestone in Transition from U.S. Dollar LIBOR

ARRC 10/15: FAQs — Updated 10/15/2020

ARRC 9/30: August – September ARRC Newsletter

ARRC 8/27: Recommended Hardwired Fallback Language for Bilateral Business Loans

ARRC 8/18: Transition Resource Guide for ARM and Private Student Loans

ARRC 8/7: ARRC Releases the SOFR Starter Kit

ARRC: Link to all ARRC Announcements

ARRC: Link to all ARRC Publications

ARRC: Link to ARRC Fallback Contract Language

Fannie Mae: LIBOR Transition Webpage

Freddie Mac: LIBOR Transition Webpage

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