Sector Update

June 3, 2019

What a difference two weeks can make! In the May 20th publication, we wrote, “As long as trade tensions remain high, it is reasonable to expect continued pressure on Treasury yields.” Tensions not only remained high, but grew in regards to China. Tensions also broadened as President Trump announced, last Thursday, the intent to levy tariffs on Mexico. Last week alone, Treasury yields declined 18-22 bps on maturities 2-years and longer and for the month of May, yields declined approximately 40 bps. It stands to reason that if yields can drop this fast they could similarly rebound, right? At this moment, I am doubtful. Threatening tariffs on Mexico raised the general level of uncertainty in markets and I think it will take actions of equal or greater magnitude to push yields meaningfully higher.

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 (May) | Monthly, 5th business day

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


WSJ: China, Mexico Signal Willingness to Step Up Trade Talks With U.S.

“China and Mexico both signaled a willingness to negotiate with Washington over escalating trade issues, while the Trump administration took to the airwaves to defend its use of tariffs to gain concessions from trading partners.”

CNBC: 10-Year Yield Continues Collapse on Slowing Growth Fears

“U.S. government debt yields fell on Monday, continuing their rout that started last month on concern the trade war is slowing the economy. The 10-year yield hit a new 20-month low.”

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 12 to 29 bps wider compared to levels in early December.

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Agency Market Update

Yields on 3-year bullets ended the week down 22 basis points at 1.95%, and 5-year bullets finished the week 19 basis points lower at 2.01%.

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Fixed Rate Mortgage Market Update

The global flight to safety continued to weigh on yields last week. Yield spreads on current production MBS to Treasurys tightened, with 15-year tightening 2 bp to 50 bps, while 30-year tightened 5bps to 72 bps.

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Municipal Market Update

Municipals prices started the week mixed, were stronger on Wednesday, mixed again on Thursday and stronger again on Friday. New issue offerings are forecasted to be $6.99B for the trading week.

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SBA Market Update

The June fixed-rate DCPC auction is scheduled for later this week (June 6th) and includes 20- and 25-year maturities. 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 approximately 5 basis points last week, continuing a methodical trend we have seen since February.

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