Sector Update

June 1, 2020



Last week, Treasury yields were slightly lower on the week. For the month of May, longer maturities were under pressure though and the yield curve steepened by 7 bps as longer maturities were up in yield and shorter maturities declined. So, while yield movements were generally unspectacular for the month, the shape of the yield curve was steeper and closed at 49 bps. What looks to be a current level of resistance.



Spreads were generally tighter in the sectors we monitor last week but there were a couple sectors with very slight breaks. Agency MBS and CMOs widened slightly along with 5- and 10-year taxable munis. In terms of activity, we see mostly customer buying with fewer bond swaps. With June 1st being a big day for municipal bond calls and maturities, we expect to see even more demand in municipal bonds in the coming weeks. Supply has been fairly tight, so spreads have compressed recently but are still 50-60 bps wider for the year.

So far this morning, U.S. stock indices are up approximately 0.3% and the yield curve is moving steeper. The long bond continues to be under pressure as shorter maturities are less affected. Supply is likely weighing on the market. Also of interest, Amazon is bringing a 6 piece bond deal (expected to price today) with 3- , 5- , 7- , 10- , 30-, and 40-year maturities.



Food for Thought – Forbearance and Prepayments

Excerpt from Strategic Insight: Agency MBS Forbearance

Factor releases on MBS should be very informative this month as forbearance data should begin to be reported and we will get a better look at prepayment behavior. Recently, refinance and purchase activity have remained strong but the June reading will more or less reflect a time frame where most of the United States was under lockdown and social distancing was quickly becoming the norm.

See “Upcoming Webinars” below to register for the Mortgage Market Update and Opportunities webinar.


SBA PPP Links

Treasury: 5/28 SBA and Treasury Department Announce $10 Billion for CDFIs to Participate in the PPP

Treasury: 5/15 SBA and Treasury Release PPP Loan Forgiveness Application


PPP Lending Facility (PPPLF)

Federal Reserve 5/15: Update on Outstanding Lending Facilities (PDF)

Federal Reserve 5/15: PPPLF Transaction-specific Disclosures (Excel)

Federal Reserve: 5/5 Agencies Modify LCR For Banks Participating in MMLF and PPPLF

Federal Reserve: PPPLF Webpage (includes Term Sheet + FAQs)


Regulatory Links

OCC: 5/20 OCC Finalizes Rule to Strengthen and Modernize CRA Regulations

FHFA: 5/19 Releases Re-Proposed Capital Rule for the Enterprises

FHFA: 5/18 Announces Refinance and Home Purchase Eligibility for Borrowers in Forbearance

FDIC: 5/15  Regulators Temporarily Change the Supplementary Leverage Ratio

FHFA: 5/13 Extends Foreclosure and Eviction Moratorium

FDIC: 5/12  Proposed Rule to Mitigate the Deposit Insurance Assessment Effect of Participation in PPP, PPPLF, and MMMLF

FHFA: 5/12 Announces Payment Deferral as New Repayment Option for Homeowners in Forbearance Plans

FDIC: 5/8 Interagency Statement on Allowances for Credit Losses and Guidance on Credit Risk Review Systems

FDIC: 5/5 Agencies Modify LCR For Banks Participating in MMLF and PPPLF


LIBOR Transition Links

ARRC 5/28: ARRC Welcomes FNMA and FHLMC’s LIBOR Transition Playbook

ARRC 5/27: ARRC Announces Best Practices for Completing Transition From LIBOR

ARRC 4/17: ARRC Announces Its Key Objectives for 2020

ARRC: 4/8:  ARRC Announces Recommendation of a Spread Adjustment Methodology for Cash Products

ARRC: 3/6:ARRC Releases a Proposal for New York State Legislation for U.S. Dollar LIBOR Contracts

ARRC: Link to all ARRC Announcements

Fannie Mae: LIBOR Transition Webpage

Freddie Mac: LIBOR Transition Webpage


Upcoming Webinars – Click for more Information and Registration

Tuesday (6/2): Banks: Mortgage Market Update & Opportunities (1 CPE)

Thursday (6/4): Credit Unions: Mortgage Market Update & Opportunities (1 CPE)


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 (May) | Monthly, 5th business day

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

 

Vining Sparks: Agency MBS Forbearance

Agency mortgage forbearance is certainly not a new topic, but it is an ever-evolving one. I have written about forbearance in other publications as the situation has evolved and thought it would be helpful to condense these into a single publication.”


Vining Sparks: Mortgage Rates and Prepayment Speeds

It is anyone’s guess what will happen with mortgage prepayments in the future. Opinions and models can vary widely and it’s easy to understand why when we stop to consider the current landscape.”


Vining Sparks: Viewing Municipal Finances through the Lens of a Pandemic

With the advent of the coronavirus pandemic, many municipal bond investors have had to reassess how to evaluate the credit risk associated with current and new investments. Issuer financial statements were published prior to the COVID-19 outbreak, so the financial review should focus on issuer strength entering into the crisis and the likely impact on revenue during and after the crisis.”


Vining Sparks: Coronavirus Chartbooks

PDF/Mobile: Coronavirus Chartbook (PDF/Mobile)



Sector Updates


Adjustable Rate Mortgage Market Update

On the week, yield spreads on Ginnie 3/1 ARMs tightened 10 bps while conventional ARMs tightened 12-20 bps.  Contrary to their adjustable-rate counterparts, 15- and 30-year fixed rate mortgages widened 5 and 7 bps, respectively, on the week.

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Agency Market Update

For consecutive weeks agency bullets mostly moved in line with Treasurys, a rarity these days after bullets gradually tightened for more than a month.  Agency callables, however, mostly did move tighter, with the largest moves seen on both the short and long ends of the curves.  Callables with 2-year maturities and 6-month lockouts tightened by the most, while 5-year finals with various call structures actually widened by a basis point.

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Fixed Rate Mortgage Market Update

Over the past ten weeks, the Fed has purchased nearly $700bn of agency MBS as part of its effort to stabilize the sector. The historic level of Fed purchases has significantly reduced price and spread volatility in the sector. The feverish pace of the Fed support in March brought spreads from the wides that rivaled the level reached in 2008/2009. Nominal 30-year mortgage spreads to Treasurys touched a stressed level of almost 150 bps. Within a week of Fed’s intention to purchase up to $50bn per day of agency MBS, spreads came in to 75 bps.

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Municipal Market Update

Municipal prices started the week mixed, and were steady daily for the rest of the week. New-issue offerings are forecasted to be $6.85B for the trading week.

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SBA Market Update

The House passed a bill last week that would allow businesses more leeway in using the funds obtained through the Treasury and SBA’s Paycheck Protection Program (PPP) created by the CARES Act to protect workers and support small businesses. Current yield spreads in SBA DCPCs were unchanged compared to last week at 95 bps. Spreads have tightened 26 bps over the last month, but spreads remain wide compared to historical levels.

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CMO Market Update

Agency CMO spreads were steady in May, ending the month within a basis point of where they started. Year-to-date, spreads have settled into the midpoint of their 2020 range. As investors continue to assess their portfolios, CMOs remain an attractive alternative to traditional MBS. With interest rates at low absolute levels, portfolio managers are seeking collateral and structure that are less susceptible to prepayments.

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