January 27, 2020
Treasury yields declined sharply last week and continue to fall this morning as concerns around the coronavirus have increased. On Tuesday, the first recorded case in the United States was confirmed in Washington state. On Thursday, a suspected case was reported at Texas A&M University (later reported negative on Sunday 1/26). On Friday, the CDC confirmed a second U.S. case in Chicago and that they were currently monitoring 63 other potential cases in the U.S.
Right now, there are over 2,800 confirmed cases worldwide with at least 80 deaths, and 5 confirmed cases in the United States. Further complicating matters is the relatively-long incubation period of up to two weeks, during which a carrier may display no symptoms but is still able to spread the coronavirus. The Fed has a meeting this Wednesday, and while virtually no one expects a rate change, it will be interesting to see if they opine on the current situation and how they might react in the event of economic weakness. Currently, in addition to last week’s decline in Treasury yields, the 2Yr -5bp | 5Yr -7bp | 10Yr -8bp.
Food for Thought
We are seeing more bid lists and bond swap activity as we enter 2020, 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. Here, 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
- 2s to 10s declined by 7 bps
- Agency Bullets slightly wider on the week by 1-3 bps.
- Agency Callables widened by 3-4 bps on 3-10-year maturities and 7-9 bps on longer maturities.
- MBS were tighter, the 15-year by 4 bps and the 30-year by 2 bps.
- CMOs were 2 bps tighter on maturities greater than 2 years.
- Corporates were 2-5 bps wider on maturities 5 years and greater.
- BQ Munis were wider by 7-9 bps on 10- and 15-year maturities. 5-year was 1 bp tighter.
- GM Munis wider by 11-16 bps across the curve.
- Taxable Munis mixed, 5-year 1 bp tighter, 10- and 15-year are 1-3 bps wider.
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 mayor of Wuhan, the city at the epicenter of China’s viral outbreak, said rules imposed by Beijing limited what he could disclose about the threat posed by the pathogen, suggesting the central government was partially responsible for a lack of transparency that has marred the response to the fast-expanding health crisis.”
“Overseas, global stocks took a hit, as the Japanese Nikkei 225 dropped 2% while the German Dax lost 2.6%. France’s CAC 40 also pulled back more than 2%. The Stoxx 600 index — which tracks a broad swath of European equities — tanked by 2.3%. The iShares MSCI Emerging Markets ETF (EEM) dropped 3.4%. Chinese markets were closed due to the Lunar New Year holiday.”
Adjustable Rate Mortgage Market Update
Last week, yield spreads between hybrid ARMs and Treasurys ended their month-long tightening trend as conventional 5/1s and 10/1s widened 1 to 2 basis points. Week over week, Z-spreads were mixed for GNMA, FNMA, and FHLMC products. ARMs underperformed mortgage-related sectors with 15- and 30-year fixed-rate mortgages tightening 2 to 4 basis point on the week.Continue Reading
Agency Market Update
Agency bullet spreads remain very tight but widened last week, particularly on the longer-end of the curve. The agency bullet curve begins to steepen up past the 5-year part of the curve. Callable agencies also widened last week.Continue Reading
Fixed Rate Mortgage Market Update
Nominal yield spreads on MBS versus comparable Treasurys tightened last week, as 15-year contracted 4 bps to 55 bps and 30-year tightened 2 bp to 88. While yield spreads are off their highs from a few months ago because of strong demand, mortgage spreads are sitting at attractive levels.Continue Reading
Municipal Market Update
Municipal prices started the week stronger, were steady on Wednesday, stronger again on Thursday and mixed on Friday. New-issue offerings are forecasted to be $5.53B for the trading week.Continue Reading
SBA Market Update
SBA floating-rate pools with uncapped quarterly resets indexed to Prime experienced a pickup in activity last week with the majority of the activity in higher coupon 10-year equipment pools priced at moderate premiums.Continue Reading
CMO Market Update
Spreads to Treasury yields tightened another 2 basis points for 3, 5, and 10-year Agency CMOs. This marks the third consecutive week of spread tightening in the CMO space. However, as mentioned in last week’s update, the sector still looks attractive.Continue Reading