Sector Update

July 29, 2019



Well, this is the week we can hopefully gain a little clarity. This Wednesday, after a month or more of “will or won’t they cut” and the back-and-forth over a 25bp or 50bp cut, the Fed will announce their monetary policy decision. A 25bp cut is widely expected and, unless there are some surprises baked in (more/less aggressive stance, change in portfolio run-off plans, etc) yields will likely be driven by other factors. Speaking of other factors, trade talks are back on again with China, but color me skeptical of any sort of imminent progress. Also on tap this week, personal income and spending, consumer confidence, and inflation readings, among others.


Last week, treasury yields finished the week higher. The short-end of the curve saw the biggest boost, perhaps as markets continued to price out the likelihood of a 50bp cut coupled with good economic data. Spreads were largely unchanged, but Munis and CMOs were the exception. Munis continued tightening as demand appears insatiable given the amount of supply. CMOs tightened in, perhaps on relative-value buying. As we have noted for some time now, CMOs are one of few areas whose spreads remain wider year-to-date.

 

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: A Key Reason the Fed Struggles to Hit 2% Inflation: Uncooperative Prices

“One reason the Federal Reserve is likely to cut interest rates this week is that inflation is running below its 2% target. New research shows why getting it higher has proved so difficult: Many of the prices consumers pay don’t respond to the strength or weakness of the economy.”

 

Bloomberg: The Home of Ultra-Low Rates Has a Warning for the World

“As the world sinks into an era of ever-lower interest rates and a chasm of negative-yielding bonds, Japan’s experience offers investors an invaluable precedent.”

 

Vining Sparks: Strategic Insight: Mid-Year Review | Time to Flip the Script?

“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?”


Sector Updates


Adjustable Rate Mortgage Market Update

Yield spreads between hybrid ARMs and Treasurys tightened approximately 1 or 2 basis points last week, despite spread widening experienced in fixed-rate MBS. We continue to see relative value in ARMs as they remain 33 to 52 bps wider compared to levels in early December.

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Agency Market Update

The most prominent theme so far in 2019 has been the abundance of call volume due to the sharp decline in market rates since November of last year.

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Fixed Rate Mortgage Market Update

Yield spreads for current production coupon MBS to Treasurys moved modestly wider last week. 15-year MBS widened by 3 bps to 55 bps while 30-year widened 1 bp to 74 bps.

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Municipal Market Update

Municipals prices were stronger on Monday, steady on Tuesday, stronger again on Wednesday, and mixed on Thursday and Friday. New issue offerings are forecasted to be $4.9B for the trading week.

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SBA Market Update

Fixed-rate DCPC yield spreads versus Treasurys tightened 6 bps on the 25yr term, 5 bps on the 20yr term, and 4bps on the 10yr term. Many floating-rate bond options currently offer similar and even higher yields than longer duration fixed-rate bonds, driven by an inverted yield curve between 3-month and 10-year Treasurys.

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CMO Market Update

CMO spreads to Treasurys tightened last week. 3-year Agency Sequentials and PACs were 3 and 4bps tighter, respectively. 5- and 10-year bonds were 5bps tighter.

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