Sector Update

November 25, 2019



As has become usual, last week was full of oft-conflicting statements on if/when a trade deal will get done. The yield curve flattened last week pivoting at the 3-year maturity. The 3-year yield was unchanged on the week while yields 2 years and shorter increased by 2 bps and yields on 5- to 30-year maturities declined by 2-9 bps. During this shortened and, lightly-staffed, trading week, it is likely that headlines on China and trade will rule this week. There are a few notable events this week though as Fed Chair Powell is scheduled to speak this evening at the Rhode Island Chamber of Commerce dinner and jobs and personal income and spending data is set for release on Wednesday.  So far today, yields are 1-2 bps lower from their close on Friday.

 

Food for Thought

Last week we looked at Taxable Municipal bonds as a sector with wide spreads. Taxable spreads remain wide this week and, until demand catches up with supply, it is likely spreads will remain elevated.

This week, we look at 15-Year MBS, another area where spreads look relatively wide as well. True, compared to some sectors, it is not as easy to look at MBS spreads on a historical basis. This is partly the case because the “right” coupon to use today will not necessarily be the best coupon to use in the past. To try and account for this difficulty, we use what is called the “Current Coupon MBS” spread. Simply put, we try to use the coupon that is currently priced the closest to par. For 15-year MBS, that is currently the 2.50 coupon.

If you take notice below, looking back over a 3-year time frame, 15-year Current Coupon MBS spreads are well above average and have been solidly outside of 1 Standard Deviation since August of this year. Investors seem to have taken notice, last week in 15-year MBS, 2.50s were a very active coupon for us, followed closely by 2.00 coupons.



Weekly Spread Commentary



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 (November) | Monthly, 5th business day

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

 

Bloomberg: Trump Tax Cut Sets Off Boom in Once Sleepy Corner of Muni Market

“The surge in issuance is a side effect of President Donald Trump’s 2017 tax-cut law, which took away the power of states and cities to sell tax-exempt bonds for a key refinancing technique. But rates have fallen far enough that they can even sell taxable bonds — which carry higher yields — to pay off old tax-exempt debt and still come out ahead.”

 

WSJ: Firms Warn of Risks in Plan to Take Fannie Mae, Freddie Mac Private

“At present, Fannie and Freddie’s securities don’t have an explicit guarantee, but the companies can tap a $250 billion Treasury line of credit in an emergency. In the absence of a congressional guarantee, the administration proposes to maintain a version of the existing Treasury backstop. Large investors in their securities say that support would be insufficient once the firms leave government control.”


Sector Updates


Adjustable Rate Mortgage Market Update

Last week, yield spreads on hybrid ARMs to Treasurys widened a basis point in response to the increased level of supply from originations.  Week over week, Z-spreads widened for GNMA, FNMA, and FHLMC products as well.

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Agency Market Update

While agency bullets largely moved in line with Treasurys, callables widened modestly after tightening for much of the previous month.  Bullets continue to trade near the tightest spreads since early summer.  In general, agency callables still appear to be relatively rich given that spreads have not increased meaningfully from two weeks ago when they were trading at the tightest levels in more than a year.

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Fixed Rate Mortgage Market Update

Yield spreads for current-coupon MBS to Treasurys widened slightly last week as the broader market traded in a narrow range. 30-year MBS widened by 2 bps to 100 bps, and 15-year widened 2 bps to 66 bps.

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Municipal Market Update

Municipal prices started the week steady, were mixed on Tuesday, stronger on Wednesday, and steady again on Thursday and Friday. New issue offerings are forecasted to be $1.47B for the holiday-shortened trading week.

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SBA Market Update

Fixed-rate SBA DCPC pools and SBIC debentures remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads. With the Fed likely on hold for the foreseeable future after another 25 bp rate cut, floating rate bonds may see a pickup in activity as part of barbell portfolio strategies.

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CMO Market Update

CMOs got a brief mention in a WSJ article from earlier this month. The piece discussed how some pension fund managers are looking to “unusual investment territory” in search of return in this low-rate environment.

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