March 2, 2020
Last week was a wild ride for market participants. In short, yields declined 32-44 bps on Treasury’s maturing in 2-10 years, U.S. stock markets were off by 11-12%, oil was down 15%, and the chorus steadily grew for Fed intervention. At this point, regardless of my opinion on efficacy, it is feasible the Fed could intervene this week, prior to their next scheduled meeting in two weeks. This type of action would be unconventional, but not unprecedented. So far this morning, stocks are up 2-3% and yields are lower in a steeper fashion on expectations of Central Bank(s) intervention.
If you paid attention to headlines over the weekend and into this morning, they’re not great. Cases continued to crop up on both coasts and internally, and sadly, two deaths were reported in Washington state. In a bit of sports news, the National College Players Association called for the NCAA to consider barring fans from tournament games given concerns over the spread of the virus. So far, in my opinion, the American public is taking the news well. I do think the next two-weeks will be telling though. I invite you to look at a Coronavirus Chartbook our Economics team is maintaining.
Food for Thought
The point I would make to portfolio managers right now is to be watchful and be prepared. With so much uncertainty in markets right now, the only thing I am certain of is that opportunities will present themselves. Of course, the hard part is discerning between and among opportunities. I think a practical way to approach this is to simply keep an open mind and focus on what we do know. Here are a few of those things:
- Taking gains is as easy now as it has been in recent history.
- A dollar saved is a dollar earned. Banks are actively managing their funding costs, both retail and wholesale, using Interest Rate Products, or taking gains and retiring FHLB funding.
- Even though yields have declined, most sectors, to varying degrees, have seen spreads widen. This blunts the yield decline.
So, if there are strategies, investments, or balance sheet tools you previously considered, but perhaps decided the timing wasn’t right, now may be the time to reconsider.
Weekly Spread Commentary
- 2s to 10s was 12 bps wider on larger 2-year decline.
- Agency Bullets relatively flat, +1 bp on 2- and 5-year maturities.
- Agency Callables 9-13 bps wider on increased rate volatility.
- MBS were wider, the 15-year was +3 bps and the 30-year was +9 bps.
- CMOs were 5-10 bps wider.
- Corporates were 11-19 bps wider, widest since mid-2019.
- BQ Munis lagged Treasurys, are 20-30 bps wider on 10-years and in, +5 bps on long end.
- GM Munis lagged as well, are 17-25 bps wider across the curve.
- Taxable Munis are 3-4 bps wider on 10-years and in, +10 bps on long end.
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 (February) | Monthly, 5th business day
SBA Prepay Commentary (February) | Monthly, 10th business day
“The warnings come as a rout in equities and climbing expectations for rate cuts as soon as this week drove long-term Treasury yields to unprecedented lows. Over the weekend, a gauge of Chinese manufacturing plunged to historic lows amid a surge in global virus cases and fatalities — including the first in the U.S.”
“Already toiling amid negative rates and slow growth, banks have been slashing costs to survive. Now they face the prospect of the economies and companies they serve being severely hit by the coronavirus outbreak, making a challenging outlook much worse.”
Adjustable Rate Mortgage Market Update
Last week was challenging for ARMs with spreads widening 8 to 13 basis points on new-issue pools. At wider spreads, ARMs underperformed mortgage-related sectors with 15- and 30-year fixed-rate mortgages widening 3 and 9 basis points, respectively, on the week.Continue Reading
Agency Market Update
Agency bullets continued their recent widening streak last week. The biggest move in the sector occurred in callables, which makes sense given the heightened volatility. While most banks’ primary exposure to moves in interest rates is to falling scenarios, callables now look relatively attractive given the rate moves over the past year.Continue Reading
Fixed Rate Mortgage Market Update
Nominal spreads on current-coupon MBS compared to Treasurys widened last week, with 15-year increasing 3 bps to 66 bps, and 30-year climbing 9 bps to 107 bps. Mortgage rates remain within 5 bps of the 2016 low and 15 bps of the 2012 low.Continue Reading
Municipal Market Update
Municipal prices strengthened on Monday and Tuesday, were steady on Wednesday, strengthened again on Thursday and were mixed on Friday. New-issue offerings are forecasted to be $8.5B for the trading week.Continue Reading
SBA Market Update
Fixed-rate DCPC yield spreads remain tighter than the twelve-month average for the 20-year and 25-year terms. Spreads tightened 2 bps month over month; 54 bps yield spread for the 25-year term and 41 bps for the 20-year term. SBA floating-rate pools with uncapped quarterly resets indexed to Prime experienced a decline in activity and lower levels of supply last week as markets are increasingly pricing in rate cuts.Continue Reading
CMO Market Update
Customers stuck to their game plan investing in CMOs with a WAL of around 3 years and an Effective Duration of 2. There was a slight shift towards bonds with less negative convexity, which makes sense in this environment. All else equal, more negative convexity translates to a less favorable price/yield relationship, i.e. less upside in terms of price appreciation when rates fall.Continue Reading