Sector Update

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

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


WSJ: Wuhan Mayor Says Beijing Rules Partially Responsible for Lack of Transparency

“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.”

CNBC: Dow drops more than 400 points as coronavirus fears rise, travel stocks slide

“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.”


Sector Updates

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.

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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.

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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.

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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.

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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.

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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.

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