Sector Update

May 18, 2020

Last week, Treasury yields were 1-6 bps lower in a flatter fashion. So, while yield movements were generally unspectacular, the shape of the yield curve was flatter and moved back below 50 bps. For some perspective, 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 2018 to find a period of time where a spread greater than 50 bps was maintained for a meaningful amount of time. Late Friday, House Democrats passed an 1,800-page $3 Trillion piece of legislation dubbed the “HEROES Act”. At some point, this author would like to think numbers such as these would encourage us as a nation to at least discuss national debt ramifications, but I will go ahead and chalk that up to wishful thinking.

Spreads in the sectors we monitor were generally tighter last week for the fourth week in a row. 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/structures providing call protection like cut coupons, low coupons, low loan balance, NY geography, etc).

This morning, markets are hopeful after a vaccine trial by Moderna produced promising, albeit it early, results. So far, U.S. stock indices are up and have more than erased last week’s declines and Treasury yields are behaving similarly. Fed Chair Powell, in a weekend interview, opined that unemployment could hit 25% before a recovery begins. Mind boggling considering that just months ago we were at multi-decade lows and currently sit at 14.7%.

Food for Thought – How Low Can Mortgage Rates Go?

Excerpt from Strategic Insight: Mortgage Rates and Prepayment Speeds

Given that economic prepayments are highly dependent on this question, I really wish I knew the answer! In a conversation with one of our traders earlier this week, I surmised that it is tough for me to see a 30-Year Mortgage rate below 2.50% without some sort of subsidy. Not a day later did a Housing Wire article catch my attention. The article announces a program by United Wholesale Mortgage (UWM) that will introduce 30-Year mortgages with rates as low as 2.50% for both purchases and refinances. There are some limitations, no cashouts or investment properties to name a couple. If you’ve never heard of UWM, according to Inside Mortgage Finance, they’re the 2nd largest overall lender behind Quicken. A 30-Year mortgage at 3.00% (and especially at 2.50%) should alter prepay expectations if other lenders react to remain competitive. Borrowers previously out of the money to refinance could see significant savings.


Treasury: 5/15 SBA and Treasury Release PPP Loan Forgiveness Application

SBA: 5/1 PPP Report: Second Round Approvals from 4/27 through 5/1

SBA: 5/1 Guidance on Whole Loans Sales of PPP Loans

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: 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)

Regulatory Links

FDIC: 5/15  Regulators Temporarily Change the Supplementary Leverage Ratio

FHFA: 5/13 Extends Foreclosure and Eviction Moratorium

FDIC: 5/12  Proposed Rule to Mitigate the Deposit Insurance Assessment Effect of Participation in PPP, PPPLF, and MMMLF

FHFA: 5/12 Announces Payment Deferral as New Repayment Option for Homeowners in Forbearance Plans

FDIC: 5/8 Interagency Statement on Allowances for Credit Losses and Guidance on Credit Risk Review Systems

FDIC: 5/5 Agencies Modify LCR For Banks Participating in MMLF and PPPLF

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

FHFA: 4/26 “No Lump Sum Required at the End of Forbearance” says FHFA’s Calabria

FHFA: 4/21 Announces that Enterprises will Purchase Qualified Loans in Forbearance to Keep Lending Flowing

FHFA: 4/20 Addresses Servicer Liquidity Concerns, Announces Four Month Advance Obligation Limit for Loans in Forbearance

LIBOR Transition Links

ARRC 4/17: ARRC Announces Its Key Objectives for 2020

ARRC: 4/8:  ARRC Announces Recommendation of a Spread Adjustment Methodology for Cash Products

ARRC: 3/6:ARRC Releases a Proposal for New York State Legislation for U.S. Dollar LIBOR Contracts

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Tuesday (6/2): Banks: Mortgage Market Update & Opportunities (1 CPE)

Thursday (6/4): Credit Unions: Mortgage Market Update & Opportunities (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 (May) | Monthly, 10th business day


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.”

WSJ: Public Pension-Fund Losses Set Record in First Quarter

Decades of overoptimistic return assumptions, insufficient pension-fund contributions and lengthening lifespans created massive shortfalls in public pension funds that the 11-year bull market didn’t cure.”

Vining Sparks: Coronavirus Chartbooks

PDF/Mobile: Coronavirus Chartbook (PDF/Mobile)

Sector Updates

Adjustable Rate Mortgage Market Update

On the week, yield spreads on Ginnie ARMs tightened 10 basis points while conventional ARMs tightened 5 to 10 basis points. Since the market dislocation in mid-March, ARM pricing spreads have tightened, but remain at attractive levels.

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Agency Market Update

Both agency bullets and callables tightened on the week, a trend that dates back to the end of March. Bullets with 2- and 5-year maturities tightened by 1 to 2 basis points.  Callables with longer finals tightened by the most, with moves in the double digits, while 5-year callables of varying structures tightened in by roughly 4 basis points.

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Fixed Rate Mortgage Market Update

The Fed has gradually lowered its planned purchases since the start of QE4. The daily total of mortgage purchases has been reduced from a peak of ~$50bn/day to a planned ~$4.5bn/day this week.  The historic level of Fed purchases has significantly reduced price and spread volatility in the sector. Prices have been pushed far higher and spreads have narrowed from distressed levels.

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Municipal Market Update

Municipal prices were mixed on Monday and Tuesday, and then strengthened daily for the rest of the week. New-issue offerings are forecasted to be $7.62B for the trading week.

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SBA Market Update

Floating-rate 7(a) prepayment speeds for the month of May were released last week. After three straight months of declining prepayments for both loan pool types,  Equipment loan pools increased from 12.0 to 12.4 CPR, while Real-Estate loan pools decreased from 13.4 to 12.5 DCPC spreads tightened 21 bps month over month for the longer maturity terms (81 bps yield spread for the 25-year term and 68 bps for the 20-year term).

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CMO Market Update

One persistent theme in the CMO space has been the level of dollar prices. Lately, investors in this sector have seen bonds with attractive yield and average life profiles, only to be faced with a sizeable premium. For many, that is a deterrent. But let’s remember, the price is what it is for a reason. Bonds that project to perform well and have desirable structures should be in high demand.

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