July 22, 2019
Last week seemed like a tug-of-war between better-than-expected economic readings and a Fed intent on communicating a willingness to ease as Treasury yields ended the week down 2-6bps. Indeed, for the prior two weeks (at least) a rate cut itself hasn’t been too much debated but whether it would be a 25 or 50bp cut. Although the week started and ended with a ~25% chance of a 50bps rate cut, it popped to 70% on Thursday as NY Fed President Williams made some surprisingly-dovish comments. The market reacted so strongly that a NY Fed spokesperson clarified his speech was “academic” and not reflective of “potential policy actions at the upcoming FOMC meeting”. All of this, coupled with better-than-expected manufacturing, consumer spending, and an increase in builder confidence has the market pretty set on a 25bp cut next week. This morning, yields on maturities 1-year and shorter have increased 1-3bps while longer maturities have declined 1-3bps.
- Agency Bullets were unchanged on the week.
- Agency Callables were mixed, largely 2bps wider.
- Corporates were 4-7bps tighter.
- Munis tightened 6bps at the 10-year, 5-year and 15-year were unchanged.
- CMOs were unchanged.
- MBS were mixed with the 15-year 1bp wider and the 30-year 1bp tighter.
- By comparison, spreads on CMOs (wider YTD) and MBS (little changed YTD), make these areas look relatively attractive.
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
“Most depositories have positioned their balance sheets for rising rates. Naturally, this came with increased exposure to falling rates. Given that interest rate risk has become more bidirectional in nature and the market is signaling a Fed ease, the question to ask right now is, should we begin to hedge against falling rates?”
“The upshot is that—barring unexpected economic developments between now and the July 30-31 meeting—the bigger debate will center on how to signal their plans and outlook beyond July.”
“Issuance in general has remained low. Municipal bond issuance slipped about 25% in 2018 and has stayed at modest levels in 2019, according to data from the Securities Industry and Financial Markets Association, an industry trade group.”
Adjustable Rate Mortgage Market Update
Yield spreads between hybrid ARMs and Treasurys widened slightly last week, 1 bp or so on average. ARMs lagged their fixed-rate MBS counterparts, with yield spreads tightening 1 bps on the 30-year fixed. We continue to see relative value in ARMs as they remain 35 to 53 bps wider compared to levels in early December.Continue Reading
Agency Market Update
Yields on 2- and 3-year agency bullets fell by 6-7 basis points and now yield 1.87-1.88%. Yields on 5-year bullets declined by 4 basis points to 1.92%. As measured by the spread between 2- and 10-year Treasurys, the yield curve flattened by 4 basis points and ended Friday at 24 basis points.Continue Reading
Fixed Rate Mortgage Market Update
Current-production coupon MBS were relatively stable last week with the 15-year wider by 1 bp to 52 bps and the 30-year tighter 1 bp to 73 bps. Mortgage spreads remain relatively wide versus historical levels and other sectors.Continue Reading
Municipal Market Update
Municipals prices were steady on Monday, mixed on Tuesday, stronger on Wednesday, mixed again on Thursday, and steady on Friday. New issue offerings are forecasted to be $6.7B for the trading week.Continue Reading
SBA Market Update
SBA floating pools with uncapped quarterly resets indexed to Prime offer attractive yield opportunities compared to 3-month T-Bills. Yield spreads versus Treasurys tightened 6 bps on the 25yr term, 5 bps on the 20yr term, and 4bps on the 10yr term.Continue Reading
CMO Market Update
CMO spreads to Treasurys were unchanged last week and this has been the theme of the month so far. Treasury yields are relatively unchanged since July 1.Continue Reading