June 8, 2020
Last week, Treasury yields were higher throughout the week and continued the trend on Friday (and perhaps cemented it) when stronger than expected (contender for understatement of the year award) payroll numbers were released. The expectation was for a decrease of 7.5 million jobs. However, the report showed an increase of 2.5 million, a flip of 10 million! Certainly, there is some noise in the data, as acknowledged by the Bureau of Labor Statistics. However, any way you seem to slice it, the data still seems better than anticipated.
For a few weeks now, I have featured the 2-10 Treasury spread graph below. It has held steady around 50 bps but crept up steadily, along with the 10-year yield last week, reaching a recent high and currently stands at 67 bps. A steepening curve makes sense while the Fed is sitting on the short end, increased long bond supply is expected, and economic optimism persists.
Spreads were tighter last week in the face of a selloff in Treasurys. Spread levels aside, I think most welcome the higher nominal yields. In terms of activity, we continue to see flat out customer investing with fewer bond swaps. In terms of popularity, MBS and CMOs (majority residential) and Municipal bonds continue to see strong demand. Agencies are picking up though for a couple reasons, I think. First, lots of called bonds are being replaced. Second, it is an area where premium weary investors can find par new-issue bonds, and occasionally bonds trading at a discount in the secondary market.
The Wednesday FOMC decision is the marquee economic release of this week. Our Economic team wrote earlier today, “Several Fed officials have discussed multiple forecast scenarios recently leading to speculation that they may publish baseline projections along with downside-risk projections. Doing so could add a powerful new communication tool. Additionally, the projections should go through 2022 and officials are likely to show a median forecast which includes no rate hikes over that horizon.”
So far this morning, U.S. stock indices are up, and the yield curve is slightly flatter. Maturities 5 years and longer have given back a few bps of yield gained last week but are still at highs not seen since late March or early April.
Food for Thought – Loans in Forbearance
In the Mortgage Market Update and Opportunities webinar last week, we discussed forbearance in a “hot topic” section. Part of the discussion included the number of borrowers electing to use forbearance. Below is a chart from the presentation, updated with the most recent data from the Mortgage Bankers Association. Many (myself included) expected these levels of forbearance to pressure prepayments down in June released factors (activity in May), but that has not been the case so far. See the most recent MBS Prepay Commentary for details on the latest release.
SBA PPP Links
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: PPPLF Webpage (includes Term Sheet + FAQs)
Federal Reserve: 6/3 Announces expansion in number and type of entities eligible to directly use its MLF
FHFA: 5/13 Extends Foreclosure and Eviction Moratorium
LIBOR Transition Links
ARRC 4/17: ARRC Announces Its Key Objectives for 2020
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 (May) | Monthly, 10th business day
Jim Chapman, finance chief of Dominion Energy says in the article, “If rates go to zero in the next seven years, we will have lost money,” … “If rates go up, we can still raise funds at around 1%. We think the upside in securing the 1% is bigger than the potential cost,”.
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)
Adjustable Rate Mortgage Market Update
On the week, yield spreads on Ginnie ARMs were unchanged and conventional ARMs tightened 1 to 5 basis points. ARMs underperformed their fixed-rate counterparts as 15- and 30-year fixed-rate mortgages tightened 9 to 12 basis points.Continue Reading
Agency Market Update
Agency debentures, both bullets and callables, reverted to a tightening trend that had largely been put on hold in recent weeks. Agency bullets tightened by the most in the intermediate and longer portion of the curve, with 5-year bullets tightening by approximately 3 basis points, and 10-year bullets moved 7 basis points tighter. Most callables across the curve and for a range of call structures tightened by roughly 2 to 5 basis points on the week.Continue Reading
Fixed Rate Mortgage Market Update
Yield spreads were volatile last week as the Treasury market sold off in a fairly dramatic fashion as payrolls improved more quickly than investors had anticipated. Nominal spreads for production MBS to Treasurys were tighter on a week-over-week basis, with 15-year tightening 12 bps to 66 bps and 30-year narrowing 9 bps to 108 bps. Although yield spreads on production coupons were generally tighter, there was widening on higher coupons, likely in response to the May prepayment report that showed speeds were faster than expected.Continue Reading
Municipal Market Update
Municipal prices started the week mixed, were steady daily through Thursday, and were mixed again on Friday. New-issue offerings are forecasted to be $8.5B for the trading week.Continue Reading
SBA Market Update
Supply in the secondary market for DCPC product has been light, while investor demand for the product remains high. Current yield spreads in SBA DCPCs tightened 10 bps last week to 85 bps over Treasuries. Spreads have tightened 25 bps over the last month, but spreads remain wide compared to historical levels.Continue Reading
CMO Market Update
This week we will review May activity with the monthly trade summary. The average projected yield on customer purchases of fixed-rate CMOs has bounced around in recent months, but seems to have settled around 1.00%. When comparing to January data, one can see how much has changed since the start of the year.Continue Reading