Sector Update

May 4, 2020

Last week, again, markets were calm given the GDP report followed up by the FOMC meeting results. GDP shrank during the 1st Quarter, but 2nd Quarter GDP is where we will see the full brunt of mandated shutdowns and social distancing. For reference, U.S. GDP shrank by 4.8% while Europe’s GDP shrank by 14.4% during the same time period. That’s the sort of magnitude shift we could see in a couple months. It is almost certainly part of the rationale behind Fed. Chair Powell pledging to do everything within their legal powers and also saying “It may well be the case that the economy will need more support from all of us if the recovery is to be a robust one.” Meanwhile, the S&P 500 capped off its best month since 1987.

Spreads were generally tighter in the sectors we monitor last week for the second week in a row at least. This is a trend that likely continues, especially in the high-grade space. To see spreads widen out significantly, it would take events like the Fed significantly backing off their purchases, a large increase in supply (not matched by demand which seems unlikely at the moment), extreme credit concerns to surface, or a meaningful increase in volatility.

So far this morning, U.S. stock indices are mixed and Treasury yields are virtually unchanged from Friday’s close. This week is cued up to be a calm one with a couple caveats. First, the acrimony continues to grow between the U.S. and China as President Trump promised a “conclusive” U.S. report on the virus’s China origins. Second, as many U.S. states (and European countries) begin to relax restrictions, all eyes are focused on whether a “second wave” of infections spoils hopes of the beginning of the end to social distancing.


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

Treasury: How to Calculate Maximum Loan Amounts – By Business Type

NCUA: 4/23 How to Become A Paycheck Protection Program Lender

PPP Lending Facility (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

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

Notable news from this past week includes:

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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 (April) | Monthly, 5th business day

SBA Prepay Commentary (April) | Monthly, 10th business day


WSJ: Small Businesses Were at a Breaking Point. Small Banks Came to the Rescue.

After years of watching big banks gobble up deposits using their slick digital apps and sprawling branch networks, community banks are flipping the script and demonstrating the value of ties to local businesses.

Bloomberg: Trump Promises ‘Conclusive’ U.S. Report on Virus’s China Origins

Trump pledged the report Sunday in a “virtual town hall” with Fox News, in which he added that he had little doubt that Beijing misled the world about the scale and risk of the disease.

Strategic Insight: Potential for Selling Held-to-Maturity Securities for Liquidity Purposes

Based on this guidance from the FDIC, we believe financial institutions that have been negatively impacted by a reduction of

liquidity due to COVID-19 may be able to sell securities classified as HTM without tainting a portfolio or jeopardizing the ability to use this classification in the future. However, each bank should check with its financial statement auditor for further clarification.

Vining Sparks: Coronavirus Chartbooks

PDF/Mobile: Coronavirus Chartbook (PDF/Mobile)

Sector Updates

Adjustable Rate Mortgage Market Update

Since the market dislocation in mid-March, ARM pricing spreads have tightened, but remain at attractive levels. For example, 5/1 ARMs have a 115 bp spread, almost 85 bps wider than they were in March 2019.  Longer-reset 7/1s and 10/1s have a 115 and 120 bp spread, respectively, approximately 75 and 73 bps wider.

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Agency Market Update

Both agency bullets and callables tightened on the week. Bullets for 2- and 5-year maturities tightened by 2 basis points while 3-year finals tightened by 6 basis points.  Despite the recent tightening trend, bullets with maturities of 3 years and out are still trading at double-digit spreads, and 5-year bullets still trading at spreads close to 25 basis points. Callables tightened by a much greater degree than bullets for nearly every tenor and call structure. Basically all callable issues with 2- to 5-year maturities tightened by roughly 20 to 25 basis points last week.

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Fixed Rate Mortgage Market Update

Nominal spreads for MBS to Treasurys were unchanged on a week-over-week basis, with 15-year remaining at 73 bps and 30-year at 93 bps. These levels are 10-25 basis points higher than they were one year ago.

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Municipal Market Update

Municipal prices started the week steady, weakened on Tuesday, were mixed on Wednesday, steady again on Thursday, and strengthened on Friday. New-issue offerings are forecasted to be $4.67B for the trading week.

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SBA Market Update

Yield spreads on SBA DCPCs remain wide, pricing at approximately 120 bps or wider to Treasurys. These spreads widened in the April auction and are significantly wider than the twelve-month average for all maturity terms. Spreads widened 34 bps month over month for both maturity terms (102 bps yield spread for the 25-year term and 89 bps for the 20-year term). Additionally, yield spreads on newer and seasoned SBICs remain wide and are pricing at approximately 120 bps or wider to Treasurys, significantly wider than the average spread of 53 bps from March 2014 to March 2020.

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CMO Market Update

Most sectors saw varying degrees of spread tightening last week, but the CMO space was an exception. Spreads to Treasurys for CMOs, as well as for MBS, were unchanged week-over-week. It was a welcomed reprieve as spreads tightened every week in April.

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The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
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