March 9, 2020
Last week was another wild ride for market participants. In short, yields declined 40 bps on Treasurys maturing in 2-10 years, U.S. stock markets eked out slight gains, oil was down 8%, and Fed cut the overnight rate by 50 bps in an emergency meeting. As it turns out, almost none of what happened last week matters right now as markets traded erratically over the weekend. For example, at one point the 10- and 30-Year Treasurys hit levels of 0.31% and 0.70% respectively. This seemed largely sparked by continuing Coronavirus worries and what looks like the beginning of an oil price fight between Saudi Arabia and Russia. Oil was down 20% over the weekend. This morning, minutes after the stock market opened, circuit breakers were tripped as a 7% decline triggered a 15-minute halt. I invite you to look at a Coronavirus Chartbook our Economics team is maintaining.
Food for Thought
Considering the Treasury Yield and Spread Snapshot below, I wanted to look at an area where spreads have widened out significantly. Looking at the data, it is hard to ignore the recent, and sharp reversal in Muni/Treasury ratios. Relative to where tax-free Munis were just a week ago at 76% of Treasurys, it currently stands at approximately 115% of Treasurys. This is an extraordinary move in a one-week time span, but I think we would all agree the last week has been anything but ordinary. By my estimation, it represents the single largest increase week-over-week since June of 2013. Reward is never free but given good credit work on the front end and adequate balance sheet liquidity, I think this sector deserves a look right now as many are grappling with the sudden and severe decline in Treasury yields.
Weekly Spread Commentary
- In terms of current spread levels, assume all are wider than close on Friday.
- 2s to 10s was 2 bps wider.
- Agency Bullets relatively flat.
- Agency Callables 2-8 bps wider on increased rate volatility.
- MBS were wider, the 15-year was +2 bps and the 30-year was +3 bps.
- CMOs gapped out, were 10-25 bps wider.
- Corporates were 10-25 bps wider, widest since mid-2019.
- BQ Munis lagged Treasurys, are 20-25 bps wider.
- GM Munis lagged as well, are 35-40 bps wider across the curve.
- Taxable Munis are 7-8 bps wider.
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 (March) | Monthly, 5th business day
SBA Prepay Commentary (February) | Monthly, 10th business day
“The current crisis is still evolving, but the relative strength of the world’s major banks could end up making this selloff look more like Black Monday than the global financial crisis. The defining quality of the latter was the total arrest of the banking system. Better defenses against a similar outcome today should assuage some of the worst fears in markets right now.”
“The New York Fed said it would boost the amount of short-term lending it conducts on a daily and biweekly basis to satisfy rising demand from financial institutions and avoid further strains as U.S. banks and businesses prepare for greater disruptions from the coronavirus epidemic.”
Vining Sparks: Loan Trading: Recreation Vehicle Performance Update
“We receive monthly performance reports on over $600mm of RV balances. We have seen a slowdown in production in recent quarters and this has also been seen across the broader industry. Although shipments have increased by nearly 150% over the last 10 years, 2019 showed a decline in shipments by 16%. This decline has reversed in 2020, with total RV shipments growing by 29% in January.”
Adjustable Rate Mortgage Market Update
Since the rally at the end of 2018, ARM pricing spreads have widened significantly, reacting strongly to each move lower in rates. Certainly, the environment for ARMs has changed dramatically over the years with the flattening yield curve, but today’s spreads are well wider than those seen during 2017 at lower dollar prices.Continue Reading
Agency Market Update
As with basically all bond sectors, agency bullets and callables continued to widen last week. Most callable investors are unsurprisingly looking for greater call lockout, typically either 6 months or 1 year until the initial call date.Continue Reading
Fixed Rate Mortgage Market Update
Nominal spreads on current-coupon MBS compared to Treasurys widened last week, with 15-year increasing 2 bps to 68 bps, and 30-year increasing 3 bps to 110 bps. We are seeing a continued widening trend today with production coupons because of an increase in prepayment expectations.Continue Reading
Municipal Market Update
Municipal prices were mixed through Thursday and stronger on Friday. New-issue offerings are forecasted to be $11.01B for the trading week. Municipal bond funds post outflows after 60 weeks of inflows.Continue Reading
SBA Market Update
Current yield spreads on newer and seasoned SBICs and SBA DCPCs have widened over the last several weeks and are pricing at approximately 74 and 68 bps, respectively, or wider to Treasurys. SBA floating-rate pools currently offer attractive yield opportunities compared to 3-month T-Bills and Fed Funds and offer similar or higher yields than longer duration fixed-rate bonds.Continue Reading
CMO Market Update
Like other spread products, the CMO space saw notable widening last week. This shouldn’t be a surprise, however, with the precipitous drop in Treasury yields. While greater relative pick-up to benchmark bonds is attractive, it is difficult to digest absolute yield levels.Continue Reading