Sector Update

July 8, 2019

For the first time in two months, Treasury yields ended the week higher. Friday’s stronger-than-expected jobs report seemed to take the wind out of the sails of those expecting a Fed cut of 50bps. Correspondingly, shorter-maturity yields increased more than their longer counterparts causing the curve to flatten. To provide some reference, we can use a popular measure of curve steepness, the difference in yield between a 10-year and 2-year Treasury. A month ago the difference was 23bps, one week ago it was 25bps, and last week it ended at 18bps. It doesn’t appear the market completely believes a cut is off the table; however, the timing and/or magnitude of a cut is more in flux than recently. For a more in-depth look, Vining Sparks is hosting an “Economic Outlook Webinar” this Thursday at 10am Central; more information is below.

Economic Outlook Webinar – Why We Believe the Fed Will Cut Rates (7/11 @ 10am Central)

There has been a sea change in the interest rate environment because trade negotiations have been more protracted than expected and inflation has, again, undershot expectations.  We will discuss why we expect the Fed to cut rates this year, perhaps as early as July 31, but also detail why we believe the cut will be an “insurance” cut – not one associated with fear of recession. If you are interested in attending, register here.


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 (June) | Monthly, 5th business day

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


WSJ: Stocks Fall as Prospects of Fed Rate Cut Recede

“The moves have come amid an escalating trade war between the U.S. and China that is pushing the world’s largest central banks—including the Federal Reserve—toward a looser monetary-policy stance as they fight to support flagging growth.”

Bloomberg: Trump Jawbones Fed Yet Again, May Be Grooming Powell Successor

“Powell, who has said uncertainties in the U.S. outlook could call for lower rates, will give his read on the economy in two days of semiannual testimony before Congress starting Wednesday. He’ll almost certainly be asked about Trump’s regular criticism.”

Sector Updates

Adjustable Rate Mortgage Market Update

ARMs outperformed their fixed-rate MBS counterparts, with yield spreads tightening 4 bps on the 15-year fixed and 3 bps on the 30-year fixed. Despite ARM spreads tightening last week, we continue to see relative value in ARMs as they remain 32 to 50 bps wider compared to levels in early December.

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Agency Market Update

Agency bullet spreads were unchanged on the week and remain at the wider end of the recent trading range. Spreads on callable agencies were basically unchanged last week and are also trading on the wider end of the recent trading range.

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Fixed Rate Mortgage Market Update

Current-production coupon MBS outperformed Treasurys last week as rates backed up. 15-year tightened 4 bps to 47 bps, while 30-year tightened 3 bps to 70 bps. Yield spreads remain at some of the widest levels observed in recent years.

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Municipal Market Update

Municipals prices were mixed on Monday, stronger on Tuesday and Wednesday, and weaker on Friday. New issue offerings are forecasted to be just under $7.0B for the trading week.

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SBA Market Update

Yield spreads on fixed-rate DCPC Pools versus Treasurys widened 3 bps on the 25-year term and 5 bps on the 20-year 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 are unchanged over the last two weeks.

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