May 11, 2020
Last week, Treasury yields were within +/- 2 bps of the prior week except for maturities 10-years and longer. So, while yield movements were generally unspectacular, the shape of the yield curve did move significantly steeper. As measured by the 2s-10s, the curve was 11 bps steeper on the week to close at 53 bps. Over the past few months, ~50 bps has been a level it hasn’t eclipsed but for a day or two and you have to go back to 2008 to find a period of time where a spread greater than 50 bps was maintained for a meaningful amount of time. We will see if the steeper curve sticks around this time, but as mentioned in links below, the Treasury is borrowing a record amount (no surprise given the stimulus measures) and they are pushing out the term of the borrowings, even re-introducing a new 20-year bond. This could continue to pressure longer Treasury yields higher.
Spreads were generally tighter in the sectors we monitor last week for the third week in a row. Oddly enough, Agency MBS were the outlier and current coupons widened slightly. We continue to see selling of TBA-eligible MBS positions (those that the Fed are buying) and redeployment of proceeds across the balance sheet (PPP loans, retiring funding, etc) and in different sectors (taxable and tax-free Munis, non-TBA eligible MBS, and CMOs with collateral providing call protection like low loan balance, NY geography, etc).
So far this morning, U.S. stock indices are mixed and Treasury yields are +/- 1 bp from Friday’s close. This week, there are economic reports providing more insight into the economy as April readings come out. Here are a few I will be watching. Tuesday will have CPI readings on inflation (deflation). Thursday features initial jobless claims which many will use to try and gauge the level of people returning to work. Setting the virus aside, I think the return to work will be slow for pure economic reasons. The CARES act allowed for an additional $600 per week (on top of what states already provide) in unemployment payments. Annualized that comes out to $15/hour which, in many areas, is already above the prevailing wage before state payments are even considered. Lastly, on Friday, retail sales will be released for April. March figures showed -8.4% the expectation for April is -11.7%.
Food for Thought – Primary/Secondary Spread (And Why You Care)
Updated from last week’s MBS Prepay Commentary.
The Primary/Secondary (P/S) spread is essentially the difference between actual mortgage rates and the “par” coupon rate. For example, if lenders could make 30-year mortgages at a rate of 4.50% and the par coupon rate is 3.00%, then the primary/secondary spread would be 1.50%.
Why do I bring this up? Currently, the Primary/Secondary spread is historically high, for a multitude of reasons including low absolute yield levels and lenders effectively rationing their refinancing bandwidth. Why do you care? If the P/S spread returns to a more “normal” level it would portend lower mortgage rates and hence, more borrowers, would be “in the money” to refinance their mortgages.
SBA PPP Links
PPP Lending Facility (PPPLF)
Federal Reserve: 5/5 Agencies Modify LCR For Banks Participating in MMLF and PPPLF
Federal Reserve: 4/30 Expands access to PPPLF to additional lenders, and the collateral that can be pledged
Federal Reserve: PPPLF Webpage (includes Term Sheet + FAQs)
Federal Reserve: 4/30 Announces it is expanding the scope and eligibility for the Main Street Lending Program
Federal Reserve: 4/27 Announces Expansion of Scope and Duration of the Municipal Liquidity Facility
LIBOR Transition Links
ARRC 4/17: ARRC Announces Its Key Objectives for 2020
Notable news from this past week includes:
- Treasury announced their borrowing estimates, ~$3 Trillion in 2Q alone.
- Treasury relaunches a 20-Year bond to fund increased borrowing.
- US private payrolls drop by 20.2 million as measured by ADP.
- It looks like mortgage lenders are tightening credit standards.
- Two-year Treasury closed at a new record low yield.
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Tuesday (5/12): Banks: The End of LIBOR (1 CPE)
Thursday (5/14): Credit Unions: The End of LIBOR (1 CPE)
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 (April) | Monthly, 10th business day
“Years ago, the financial crisis revealed the folly of churning out “liar loans.” Regulators cracked down, and mortgages made today are generally more conservative. What regulators didn’t focus on was the strength of the mortgage companies themselves. Though the loans are sturdier, the infrastructure largely didn’t change.”
“As part of its quarterly refunding, the department said it will introduce a 20-year coupon bond later this month. An auction May 20 will feature a sale of $20 billion worth as part of an effort to push the record-setting debt levels further out in terms of duration.”
Vining Sparks: Coronavirus Chartbooks
PDF/Mobile: Coronavirus Chartbook (PDF/Mobile)
Adjustable Rate Mortgage Market Update
On the week, yield spreads between hybrid ARMs and Treasurys were mixed with 5/1 and 7/1 conventionals tightening 15 to 20 basis points while longer-reset 10/1s widened 5 basis points. Like their longer-reset adjustable-rate counterparts, 15- and 30-year fixed-rate mortgages widened 2 and 11 basis points, respectively, on the week.Continue Reading
Agency Market Update
Both agency bullets and callables resumed their recent tightening trend last week. Bullets for 2- and 3-year maturities tightened by 2 basis points while 5-year finals were basically unchanged. The most significant spread moves in callables on the front end of the curve were in 3-year finals with varying call structures, while longer 10- to 15-year terms also tightened in.Continue Reading
Fixed Rate Mortgage Market Update
Nominal spreads for production MBS to Treasurys were wider on a week-over-week basis, with 15-year increasing 2 bps to 75 bps and 30-year increasing 11 bps to 104 bps. Nearly all coupons were wider across the 30-year coupon stack, apart from 30-year 2.0s, which tightened 10 bps. This was related to the Fed as they began buying this coupon last week.Continue Reading
Municipal Market Update
Municipal prices strengthened daily over the week. New-issue offerings are forecasted to be $5.0B for the trading week.Continue Reading
SBA Market Update
Current yield spreads in SBA DCPCs remain wide but tightened last week. Spreads generally range from 70 to 110 bps for new and seasoned DCPCs.Continue Reading
CMO Market Update
Given the high dollar prices in this space, customers have been looking to different collateral or structure types in hopes of attaining more stable cashflows. For example, the Trade Desk has seen interest in bonds backed by loans with low original max loan sizes. All else equal, it should not be economically favorable for these borrowers to refinance, providing the stable cashflow that investors seek.Continue Reading