Sector Update

June 10, 2019



Last week, Treasury yields were down 5-10 bps across maturities ranging from 2-10 years. Contributing to the decline in yields last week were disappointing manufacturing and payroll reports, seeming certainty of easier monetary policy, and the ongoing trade dispute with Mexico. The trade dispute came to an end late Friday, but so far, yields have only rebounded 3-4 bps this morning. A frequent question I receive (even more lately with this volatility) is “what do you like?”. At this moment, I think investors need to avoid reaching for returns and focus on mitigating risk(s). For depositories, this means making investment decisions designed to protect your balance sheet to the risk it faces, then look for the best returns within that framework.


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 (May) | Monthly, 10th business day

 

WSJ: Factories Throttle Back, Pressuring U.S. Economy

“American consumers and companies are buying fewer cars, trucks and tractors and building fewer houses. That, in turn, is weighing on demand for wheels and steel parts, washing machines and paint.”


Bloomberg: A Fed Rate Cut Looks More Likely. The Question is When and by How Much

“What’s less certain is when the Fed will act and how big any cut will be — a more traditional 25 basis point move or a bolder, 50 basis point reduction designed to get a bigger bang for the buck.”


Sector Updates


Adjustable Rate Mortgage Market Update

ARMs lagged their fixed-rate MBS counterparts, with yield spreads tightening 2 bps on the 15-year fixed and 5 bps on the 30-year fixed.  We continue to see relative value in ARMs as they remain 13 to 34 bps wider compared to levels in early December.

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Agency Market Update

With the market continuing to price in better chances of rate cuts going forward, yields declined by double digits on the front end of the curve and approximately 7 basis points for 3-5 year terms. The spread between 2- and 10-year Treasurys increased to ~24 basis points and that portion of the curve is now the steepest it has been since the end of November.  The 3-month to 10-year portion remains inverted and now stands at approximately -23 basis points.

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Fixed Rate Mortgage Market Update

Mortgages outperformed Treasurys during the past week as yield spreads on current production MBS to Treasurys tightened. The 15-year tightened 2 bp to 48 bps, while the 30-year tightened 5bps to 67 bps. June-released factors showed that May fixed-rate prepayments increased for all three agencies for the fourth consecutive month.

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Municipal Market Update

Municipals prices started the week stronger, were mixed daily through Thursday and stronger again on Friday. New issue offerings are forecasted to be $9.9B for the trading week.

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SBA Market Update

Issuance was virtually flat and spreads widened in the June fixed-rate DCPC auction last Thursday compared to the May auction.  SBA 7(a) prepayment speeds for June will be available later this week.

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CMO Market Update

CMO spreads to Treasury yields widened once again last week. 2-3 year PACs and Sequentials were 3-5 basis points wider, while 5- and 10-year bonds widened 2-3 basis points. Earlier this year, spreads for intermediate-term paper broke through highs from recent years, but now spreads for shorter bonds have as well. By our measurements, spreads on 3-year Agency CMOs have not been this wide since late 2016.

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