Sector Update

July 13, 2020

Treasury yields moved flatter last week with the 2-10 spread closing 3 bps tighter at 49 bps. Maturities 7-years and shorter all closed within 1 bp of where they began the week. Longer maturities saw declines of 2-9 bps. There was some volatility this week, especially Thursday and Friday. On Friday, a selloff pushed yields higher after testing recent lows on some maturities.

So far this morning, U.S. stock indices are up approximately 1.25% to 1.8%. The Treasury curve’s slope is 1 bp flatter from Friday’s close at 48 bps. From a yield perspective, Treasury bills are unchanged, 2- to 10-year maturities are unchanged to down 1 bp and long bonds are also unchanged to down 1 bp. This week, eyes will be glued to corporate earnings announcements, especially their forward guidance. Also, of note this week, mortgage applications on Wednesday along with retail sales and jobs data on Thursday. With so much going on and the rapid pace with which it occurs, make sure not to miss our 3Q Economic Outlook Webinar tomorrow morning.

Upcoming Webinar (Click for Info. and Registration)

Tuesday (7/14): 3Q Economic Outlook Webinar (CPE Eligible)

Food for Thought – Loan Balance Pools

Adapted from 7/7 MBS Prepay Commentary

Many investors are looking for ways to mitigate, or at least decrease, the prepayment risk inherent in MBS bonds. One way is to look at specified pools with lower loan balances than a more generic pool. Mathematically (and intuitively) we know a lower loan balance, all else equal, requires a larger rate decrease for a refinance to make economic sense for the borrower. There is also history to support this. For example, let’s consider 30-year 3% MBS issued in 2018 (FNCL 3 – 2018) against “loan balance” pools of the same vintage. Consider the 30-year 3% MBS issued in 2018 with a maximum loan size of $125,000 (FNCL 3 – 2018 LB 125). For the most recent reading, the generic 30-year 3s of 2018 had a trailing 3-mo CPR of 40.1 compared to 8.4 for the “125K max” pools issued in the same year. Yes, there is a “pay-up” associated with loan balance pools. However, given what we know coupled with historical evidence, the pay-up could be worthwhile as a form of insurance against prepayments.

Spread Commentary – Almost All Tighter

(Click links below for more detail)

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 (July) | Monthly, 5th business day

SBA Prepay Commentary (June) | Monthly, 10th business day


Freddie Mac: Mortgage Rates Hit Another All-Time Record Low

“30-year fixed-rate mortgage averaged 3.03 percent with an average 0.8 point for the week ending July 9, 2020, down from 3.07 percent. A year ago at this time, the 30-year FRM averaged 3.75 percent.”

WSJ: Are Banks Afraid of Covid-19? Watch How Much They Set Aside for Loan Losses This Week

“Lending money has become a much riskier proposal, forcing banks to put aside billions of additional dollars in case consumers and businesses stop paying. And early this year, the Federal Reserve cut interest rates, which was meant to shore up the economy but also lowered the margin banks can make on any lending they do.”

Vining Sparks: Coronavirus Chartbooks

PDF/Mobile: Coronavirus Chartbook (PDF)

Regulatory Links

FDIC: 7/10 Consolidated Reports of Condition and Income for 2Q 2020 (FIL-69-2020)

FHFA: 7/9 FHFA Extends COVID-Related Loan Processing Flexibilities for FN/FH Through August

FDIC: 7/1 FFIEC Joint Statement on Managing the LIBOR Transition (FIL-68-2020)

Federal Reserve: 7/1 Minutes of the Federal Open Market Committee, June 9-10, 2020

FHFA: 6/29 FHFA Provides Tenant Protections

Federal Reserve: 6/25 Results of stress tests for 2020 and additional sensitivity analyses in light of coronavirus

Federal Reserve: 6/25 Agencies finalize amendments to swap margin rule

OCC: 6/22 Assessments: Interim Final Rule

FHFA: 6/17 FHFA Extends Foreclosure and Eviction Moratorium

OCC: 6/16 OCC Reports Mortgage Performance Remains Stable

FHFA: 6/15 FHFA to Re-Propose Updated Minimum Financial Eligibility Requirements for FN & FH Seller/Servicers

Treasury: 6/15 Statement from Secretary Steven T. Mnuchin on the Main Street Lending Program

LIBOR Transition Links

ARRC 7/8: ARRC Releases a Tool to Help Firms Move Internal Systems and Processes away from LIBOR

ARRC 6/30: Further Details Regarding Its Recommendation of Spread Adjustments for Cash Products

ARRC 6/30: Recommended Fallback Language for Private Student Loans

ARRC 6/30: Updated Recommended Hardwired Fallback Language for Syndicated Loans

ARRC 6/5: ARRC Welcomes CFPB’s Updated Consumer Handbook and Proposed Rule Facilitating Transition Away from LIBOR

ARRC 5/28: ARRC Welcomes FNMA and FHLMC’s LIBOR Transition Playbook

ARRC 5/27: ARRC Announces Best Practices for Completing Transition From LIBOR

ARRC 4/17: ARRC Announces Its Key Objectives for 2020

ARRC: 4/8:  ARRC Announces Recommendation of a Spread Adjustment Methodology for Cash Products

ARRC: Link to all ARRC Announcements

Fannie Mae: LIBOR Transition Webpage

Freddie Mac: LIBOR Transition Webpage


SBA: 7/6  SBA and Treasury Announce Release of Paycheck Protection Program Loan Data

SBA: 6/19 SBA and Treasury Announce Enhanced Transparency Regarding the PPP

SBA: 6/17 SBA and Treasury Announce New EZ and Revised Full Forgiveness Applications for the PPP

SBA: SBA PPP Webpage

PPP Lending Facility (PPPLF)

Federal Reserve 7/10: Update on Outstanding Lending Facilities (PDF)

Federal Reserve 7/10: PPPLF Transaction-specific Disclosures (Excel)

Federal Reserve: PPPLF Webpage (includes Term Sheet + FAQs)

The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
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