July 6, 2020
Treasury yields moved in a steeper fashion last week and closed 5 bps steeper as measured by the 2-10 spread. The short end of the curve was 1-2 bps lower in yield and longer maturities were 1-6 bps higher. Even though every economic data point was not positive last week (like jobless claims) most of them were and this pushed longer yields higher. The short end of the curve is anchored by the Fed and considering the release of their June FOMC minutes (which signaled a dovish stance for years to come) it makes sense they continue to react the way they do. In other news, on July 4th the SBA received approval to re-open the PPP and reportedly were able to begin accepting new applications at 8:00 am CST this morning.
Spreads were mixed last week. In the Government/Agency space, bullets were 2bps tighter on the “wings” with intermediate unchanged. Callables were 3bps wider on 5- and 10-year maturities and unchanged elsewhere. SBA DCPCs continue to tighten, down 25bps over the past month. This brings them within a couple basis points of their spread from the beginning of the year. Agency MBS also tightened but are still 5-8 bps wider than the start of this year. Agency CMOs were unchanged and are still 10-20 bps wider than they started the year. Looking at credit, spreads were largely 2-4 bps tighter in Corporates and Munis. Taxable munis were an exception though and were 4-10 bps wider.
So far this morning, U.S. stock indices are up approximately 1.3% to 2.0%. The Treasury curve’s slope is 1 bps steeper at 53 bps. From a yield perspective, Treasury bills are 1bp higher, 2- to 10-year maturities are 1-2 bps higher and long bonds are 3 bps higher. The ISM Non-Manufacturing Index came in at 57.1 this morning, over 50 is considered expansionary. The prior reading was 45.4. Of great interest to me, but I also suspect many others given the increase in activity in this sector, mortgage prepayment speeds will be released this evening. Look for updated commentary tomorrow afternoon.
Adjustable Rate Mortgage Market Update
Since the market dislocation in mid-March, ARM pricing spreads have tightened, but remain at attractive levels. For example, 5/1 conventional ARMs have a 52 bp spread, almost 22 bps wider than they were in March 2019. Longer-reset 7/1 and 10/1 conventionals have a 65 and 80 bp spread, respectively, approximately 25 and 33 bps wider. Relative value players may find Ginnie 5/1s to be attractive with their 130 bp spread, approximately 93 bps wider than early 2019 levels.
Agency Market Update
Agency bullets continued to tighten last week and spreads across the curve are now at the tightest levels since the pandemic-led market disruptions from March. Callable spreads moved higher last week and largely erased the tightening moves seen the previous week for 5- to 10-year maturities. The 7-year part of the curve continues to be the shortest maturity to reach a 1.00% yield on callables.
Fixed Rate Mortgage Market Update
Nominal spreads for production MBS to Treasurys were tighter on a week-over-week basis. 15-year tightened 8 bps to 65 bps and 30-year tightened 11 bps to 100 bps. Despite the recent bout of tightening nominal spreads are higher on a year-over-year basis by approximately 18-20 bps.
Municipal Market Update
Municipal prices were steady daily. New-issue offerings are forecasted to be $7.38B for the trading week.
SBA Market Update
Current yield spreads in SBA DCPCs continued the tightening trend last week, tightening 10 bps to 60 bps over Treasurys. Spreads have tightened 25 bps over the last month and are within 1 to 2 bps of year-end and prior year spreads.
CMO Market Update
Customers were extremely active in the CMO space during the month of June. Activity was defined by primarily one-way flows, with investors buying bonds outright from cash on hand as called bonds and prepayments continue to provide a source of funds. For the third consecutive month, we saw a meaningful amount of floating-rate CMOs purchased, albeit a smaller percentage than in the first two months of the second quarter.
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 (June) | Monthly, 5th business day
SBA Prepay Commentary (June) | Monthly, 10th business day
“…showing that the 30-year fixed-rate mortgage (FRM) averaged 3.07 percent, the lowest rate in the survey’s history dating back to 1971.”
“Small-business owners now have until Aug. 8 to apply for PPP loans. The Small Business Administration will begin accepting loan applications Monday, an SBA official said. The program’s original deadline was June 30.”
“Mr. Hamvas works for Convergint Technologies, which services many of the largest U.S. banks. Calls to service drive-through equipment jumped 42% in April and May compared with the average of the previous 12 months, the company said. Cylinder sales are up 300% over the same period.”
Vining Sparks: Coronavirus Chartbooks
PDF/Mobile: Coronavirus Chartbook (PDF)
SBA PPP Links
SBA: SBA PPP Webpage
PPP Lending Facility (PPPLF)
Federal Reserve 6/10: Update on Outstanding Lending Facilities (PDF)
Federal Reserve 6/10: PPPLF Transaction-specific Disclosures (Excel)
Federal Reserve: PPPLF Webpage (includes Term Sheet + FAQs)
FHFA: 6/29 FHFA Provides Tenant Protections
Federal Reserve: 6/25 Agencies finalize amendments to swap margin rule
OCC: 6/22 Assessments: Interim Final Rule
Federal Reserve: 6/8 Expands MSLP to allow more small and medium-sized businesses to receive support
Federal Reserve: 6/3 Announces expansion in number and type of entities eligible to directly use its MLF
LIBOR Transition Links
ARRC 4/17: ARRC Announces Its Key Objectives for 2020
Fannie Mae: LIBOR Transition Webpage
Freddie Mac: LIBOR Transition Webpage