Sector Update

July 15, 2019



Broad US Stock Indices (Dow Jones, S&P 500, and NASDAQ) all hit new record highs last week and Treasury yields largely ended the week higher for the second week in a row. After last week’s Fed communications, it appears, perhaps, that market participants expect the Fed to let inflation run higher. This would be consistent with the curve movement last week. The curve pivoted at the 2-year maturity as those yields decreased while their longer counterparts increased, causing the curve to steepen. The 2s10s spread closed out the week at 27bps. For the year, the curve is within 1bp of its steepest level of 28bps on June 19th. On tap for this week, there is plenty more Fedspeak and the second-quarter earnings season kicks off.

 

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 (July) | Monthly, 5th business day

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

 

WSJ: Second-Quarter Earnings to Test Soaring Market

“Stocks have busted through records recently, rising thanks in large part to dovishness from the Federal Reserve. The central bank has positioned itself to cut interest rates this month for the first time since the financial crisis.”


WSJ: As Banks Report Earnings, Fed Looks to Take Away the Punch Bowl

“Big banks start reporting second-quarter earnings Monday, and investors will be closely watching for signs of how much the Fed’s change in rate policy could hurt the banking business.”


Sector Updates


Adjustable Rate Mortgage Market Update

Demand for new-issue hybrid ARMs slowed, which resulted in yield spreads to Treasurys widening 1 to 2 bps. ARMs outperformed their fixed-rate MBS counterparts, with yield spreads widening 4 bps on both the 15- and 30-year fixed.  We continue to see relative value in ARMs as they remain 34 to 52 bps wider compared to levels in early December.

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Agency Market Update

Agency bullet spreads tightened on the week and are back to levels not seen in a month. Spreads on callable agencies also tightened versus sovereign debt for most tenors and call structures.

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Fixed Rate Mortgage Market Update

Current-production coupon MBS widened last week with the 15-year wider by 4 bps to 51 bps and the 30-year wider 4 bps to 74 bps. On a nominal basis, mortgage spreads have remained relatively unchanged on the year, as most other sectors have tightened.

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Municipal Market Update

Municipals prices were steady on Monday, stronger on Tuesday, and mixed daily for the rest of the week. New issue offerings are forecasted to be just over $7.0B for the trading week.

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SBA Market Update

The July fixed-rate DCPC auction drew strong investor interest as many portfolio managers are considering strategies to extend duration and call structures to protect against falling rates. Fixed-rate SBA DCPC pools and SBIC debentures remain attractive as they offer superior convexity profiles to most residential MBS alternatives.

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CMO Market Update

CMO spreads to Treasury yields tightened 5 basis points in the 5-year space and 1-2 basis points for 3-year paper.

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