Sector Update

June 17, 2019

Last week, Treasury yields behaved in what I can best describe as a “Bull Steep” move. Shorter maturities, 3 months and in, declined about 10bps on presumed rate cuts by the Fed. Meanwhile, longer maturities dropped by less or even increased. Regarding the upcoming week from this morning’s Market Today, “This week’s economic calendar will include several reports on housing and the regional Fed surveys from New York and Philadelphia. Much more importantly, however, will be Wednesday’s FOMC decision. Coming into the decision, trade talks have broken down with China, inflation has proven much softer than expected, and inflation expectations have dropped. As a result, the markets are expecting the Fed to ease policy this year, although there is not much conviction that the first cut will be this week. Rather, Fed Funds Futures contracts show that investors expect a cut at the Fed’s July meeting (92% likelihood) followed by at least one more cut later in the year.”

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: Markets Send Mixed Signals on Trade Battle

“Either way, many feel the current disconnect between the bond and stock markets is unsustainable. Fresh economic data ahead could spur one market to converge with the other.”

WSJ: Corporate Bonds Give Reassuring Signals Amid Market Jitters

“In recent weeks, the extra yield, or spread, investors demand to hold U.S. corporate bonds over Treasurys has generally increased, a sign of reduced risk appetite among investors. Spreads, however, have leveled off in recent days and remain well below the levels they reached in early January and during previous growth scares, such as the one that occurred in late 2015 and early 2016.”

Sector Updates

Adjustable Rate Mortgage Market Update

For the sixth consecutive week, demand for new-issue hybrid ARMs slowed, which resulted in yield spreads to Treasurys widening 1 to 2 bps. ARMs outperformed their fixed-rate MBS counterparts, with yield spreads widening 4 bps on the 15-year fixed and 11 bps on the 30-year fixed.

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Agency Market Update

For investors looking for yield, or some pickup in yield for added duration, the agency curve maintains its steepness for maturities of 5 years and longer: while there is only a ~4 basis point difference between 2- and 5- year agency bullets, the slope of the agency curve increases to ~45 basis points between 5- and 10-year maturities on bullets.

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Fixed Rate Mortgage Market Update

Yield spreads on current production MBS to Treasurys widened significantly last week. The 15-year widened 4 bps to 54 bps, while the 30-year widened 11 bps to 79 bps.

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Municipal Market Update

Municipals prices were mixed on Monday and Tuesday, steady on Wednesday, and mixed again on Thursday and Friday. New issue offerings are forecasted to be $6.19B for the trading week.

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SBA Market Update

SBA floating-rate pools traded to financial institutions last week, with the most active trading in par-priced floaters and seasoned Real-Estate pools. SBA prepayment speeds for SBA 7(a) pools posted minor declines in speeds compared to the prior month. Fixed-rate SBA DCPC pools and SBIC debentures remain attractive as they offer superior convexity profiles to most residential MBS alternatives. 

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CMO Market Update

CMO spreads to Treasurys widened again last week, extending recent highs for 3-, 5-, and 10-year Agency PACs and Sequentials. While CMO yields are at or near lows this year, they have held up well in relation to Treasurys.

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