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)
- Government/Agency Space
- Bullets were 2-3 bps tighter on 5- and 10-year maturities.
- Callables were 1-2 bps tighter save 15-year maturities which were 3 bps wider.
- Agency CMBS, MBS, and ARMs
- SBA DCPCs stopped their 20 bps MoM tightening and were unchanged on the week.
- Agency MBS also tightened and are now within 3 bps of where they started the year.
- Agency CMOs, previously spared, all moved 5-6 bps tighter this week. Expect to continue.
- BQ Munis tighter by 7-14 bps, BQ curve was steeper on the week.
- GM Munis relatively calm, +/- 2 bps on 5- and 10-year maturities. 15-year was 5 bps wider.
- Taxable Munis tighter by 6-17 bps, curve was steeper on the week.
- Corporates, from shorter to longer maturities, were 3-11 bps tighter.
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)
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 PPP Links
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)