Sector Update

June 15, 2020

The euphoria over the much stronger-than-expected jobs report from the Friday before last appears to have been short-lived.  The market headed into last week filled with optimism over the economy reopening, leading to a swift bond selloff and further melting up in stocks—that is, until the Fed met last week and poured cold water on the market exuberance with its doom-and-gloom (read:  realistic) economic forecast.  In a nutshell, the Fed sees a long path to recovery and reiterated its accommodative stance, holding rates near zero for the foreseeable future and putting a floor on its QE purchases by stating they will continue buying Treasury and MBS assets at their current pace.  Fed Chair Powell even said at his press conference on Wednesday that the FOMC is “not thinking about raising rates, we’re not even thinking about thinking about raising rates.”  In addition to the Fed meeting, fear of a second wave in coronavirus cases increasingly weighs on market sentiment, particularly as numerous states are seeing rapid increases in positive COVID-19 cases.  The risk-on trade that carried into the week quickly reversed course on Wednesday and continued in earnest on Thursday, as the S&P 500 had its worst day since March 16th (and its 4th worst day of the past 11 years) and Treasurys rallied significantly, particularly on the longer end of the curve.  Stocks and bond yields were both up marginally Friday but by the end the trading session, the 2-year yield was down 2 basis points on the week, the 5-year down 14 basis points, and the 10-year down 19 basis points from the week before.  The flight-to-quality trade is continuing this morning with bonds rallying further and both the S&P 500 and Dow indices down more than a percentage point.

Over the past month this space has featured the 2s-to-10s Treasury spread graph below.  Leading up to and following the May jobs report the yield curve slope finally broke out of its recent trading range near 50 basis points, and the selloff sent the 10-year yield close to 0.90% (gasp!), and the 2s-to-10s spread neared 70 basis points.  The Treasury rally in the latter half of the week quickly flattened the curve down to its previous slope, and the 2s-to-10s spread fell back below 50 basis points.  Easy come, easy go—so much for a steeper curve!

Spreads were mixed last week amidst the Treasury rally—agency callables, corporates, and shorter maturity munis all widened while CMOs, fixed SBAs and longer munis tightened versus government debt.  In terms of popularity, there are no sectors that Vining Sparks participates in that are not moving right now.  Customers are flush with liquidity and busy buying bonds across the trade desk, and while absolute yields are down sharply year-to-date, basically every bond sector is trading at wider spreads for the year.  It is anyone’s guess as to how long spreads will remain at these elevated levels.

So far this morning, U.S. stock indices are down and the yield curve is slightly flatter.  Treasury yields are basically unchanged out to 5 years, while 7- and 10-year yields are down 1 to 2 basis points, and the yield curve is now essentially unchanged from the beginning of the month.  This week the market will look to commentary from numerous Fed members, including Jay Powell’s semiannual testimony to the Senate Banking Committee tomorrow, but given this comes on the heels of the Fed meeting last week there will likely be less interest than usual.  Additionally, investors will keep a watchful eye on the coronavirus data—although Treasury Secretary Steven Mnuchin said last week that “we can’t shut down the economy again,” a surge in positive cases will surely slow down activity that appears to be inching back to normal.


SBA: 6/12 SBA and Treasury Announce New and Revised Guidance Regarding the Paycheck Protection Program

Treasury: 6/8 SBA and Treasury Joint Statement on Enactment of the PPP Flexibility Act

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 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)

Regulatory Links

Federal Reserve: 6/8 Expands MSLP to allow more small and medium-sized businesses to receive support

FHFA: 6/8 Latest Quarterly Prepayment Monitoring Report and Announces Next Steps with Respect to UMBS Pooling Practices

OCC: 6/4 Activities and Operations of National Banks and Federal Savings Associations: Notice of Proposed Rulemaking

Federal Reserve: 6/3 Announces expansion in number and type of entities eligible to directly use its MLF

OCC: 6/2 Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred: Final Rule

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

LIBOR Transition Links

ARRC 6/5: ARRC Welcomes CFPB’s Updated Consumer Handbook and Proposed Rule Facilitating Transition Away from LIBOR

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

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


Reuters: Fed launches long-awaited Main Street lending program

“The program, targeted at companies that were in good shape before the pandemic but may now need financing to retain workers and fund operations, will offer up to $600 billion in loans through participating financial institutions to U.S. businesses with up to 15,000 employees or with revenues up to $5 billion.”

Vining Sparks: Loan Trading: Assistance Survey III

Over the last two months, VSLT has surveyed over 250 financial institutions in more than 45 states regarding the level and type of assistance offered to borrowers. Although the COVID-19 pandemic has continued to impact regions of the country at varied levels, the vast majority of depository institutions are offering loan deferment to assist their customers. For the context of this survey the term deferment is inclusive of deferred or skipped payments, temporary interest only payments, or any other temporary loan modification to assist borrowers.”

Vining Sparks: Coronavirus Chartbooks

PDF/Mobile: Coronavirus Chartbook (PDF)

Sector Updates

Adjustable Rate Mortgage Market Update

On the week, yield spreads on Ginnie and conventional ARMs tightened 2 to 5 basis points, a continuing trend since mid-March. Fixed-rate mortgage spreads were mixed with shorter 15-year product widening a modest 2 bps while 30-years tightened 3bps.

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Agency Market Update

Agency bullet spreads were mixed last week, as both shorter and longer maturities tightened while maturities with 2- to 3-year maturities widened.  Agency callables widened across the curve and the biggest moves occurred in 5-year terms, as most structures for that maturity traded wider by approximately 8 basis points.

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Fixed Rate Mortgage Market Update

Nominal spreads for production MBS to Treasurys were mixed on a week-over-week basis. 15-year widened 2 bps to 68 bps and 30-year tightened 3 bps to 105 bps.  The tightening was more prevalent in higher coupons, likely in part by the Fed’s promise to continue to buy mortgages at least at the current pace.

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Municipal Market Update

Municipal prices started the week steady, were mixed on Tuesday, steady again on Wednesday, and mixed again on Thursday and Friday. New-issue offerings are forecasted to be $11.6B for the trading week.

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SBA Market Update

Current yield spreads in SBA DCPCs tightened 5 bps last week to 80 bps over Treasurys. Spreads have tightened 20 bps over the last month, but spreads remain wide compared to historical levels. SBA 7(a) prepayment speeds for the month of June experienced the largest month-over-month drop in years and it is likely that this summer season will be a historically low prepayment period.

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CMO Market Update

Activity continues to center on lower coupons in the fixed-rate space as investors seek protection from prepayments. There has been decent activity in HECM floaters as well. Trades last week were defined by one-way flow with customers investing outright from cash. As mentioned in recent weeks, the Trade Desk is actively seeking bid lists for customers looking to clean up smaller positions or potentially take some profits as dollar prices remain elevated.

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