Sector Update

November 4, 2019

Treasury yields broke a 3-week streak of increases and declined last week by 7-10 bps on maturities 2-years and longer. The big news last week, though widely expected, was the Fed cutting rates by 25 bps on Wednesday and signaling a pause. Through Wednesday, yields were down just 1-3 bps with most of the decline occurring on Thursday as a headline, “China is said to doubt long-term trade deal possible with Trump” and the Chicago PMI declined to its second-weakest reading since 2009 weighed on markets. Meanwhile, the S&P 500 and NASDAQ closed at new record highs on Friday.

This morning, yields are 4-7 bps higher as positive news is out surrounding a potential “phase one” trade agreement with China. Reportedly, both sides are even considering where to sign a potential deal, including Iowa, Alaska, Hawaii, and locations in China. Given as many false starts that have occurred, one can not help but wonder if this is a case of getting the cart ahead of the horse? Apparently, the stock market doesn’t think so as the Dow Jones, S&P 500, and NASDAQ are all trading at record levels at the time of this writing.

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 (October) | Monthly, 5th business day

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


Bloomberg: China Reviews Xi’s Options to Visit U.S. to Ink Trump Trade Deal

“Top American and Chinese negotiators both spoke on the phone Friday and described the talks as “constructive” as they look to lower tensions in a trade war that has roiled global growth. On Saturday after the call, Chinese state media reiterated the nation’s core demands, including the removal of all punitive tariffs.”

WSJ: Investors Should Watch Out for an Unbalanced Economy

“Traders betting on future Fed rates have similarly become more confident in the economic outlook. The chance of rates falling to 1% or lower by next September—from the current 1.5%-1.75% range—has dropped from 75% two months ago to 26% on Friday, according to CME Group. The markets think either that the Fed’s three insurance cuts will work and the economy stabilizes, or that lower trade and Brexit risks have reduced the chance of recession, or both.”

Sector Updates

Adjustable Rate Mortgage Market Update

Hybrid ARM issuance remains quite low.  The monthly net supply of ARMs continues to run at a negative $2-3 billion pace, while fixed rates are expected to grow at $20-30 billion each month for the rest of the year.  As of October, hybrid ARM issuance represents ~ 0.85% of overall MBS issuance. We continue to see relative value in longer-reset 7/1s and 10/1s as they remain approximately 39 and 41 bps wider, respectively.

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Agency Market Update

Agency bullets mostly moved in line with Treasurys, while callables resumed their recent tightening trend.  Although bullet spreads were little changed on the week, most bullets are trading at the tightest spreads since May.  Some callables, particularly less structured calls, are now trading at the tightest spreads in roughly 6 months but with some tenors still at 50+ basis points over Treasurys.

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Fixed Rate Mortgage Market Update

Yield spreads for current coupon MBS to Treasurys tightened last week. 30-year MBS tightened by 7 bps to 100 bps, while 15-year tightened 3 bp to 67 bps. Despite the recent retreat from the wides of the year, MBS valuations remain compelling.

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Municipal Market Update

Municipal prices were mixed on Monday and Tuesday, steady on Wednesday, stronger on Thursday and steady again on Friday. New issue offerings are forecasted to be $12.92B for the trading week.

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SBA Market Update

Many floating-rate bond options currently offer similar yields compared to longer duration fixed-rate bonds, driven by a flat yield curve between 3-month and 5-year Treasurys. 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.

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CMO Market Update

Last week’s update was not intentional foreshadowing. We referenced the increased VADM activity observed in September and questioned if the product would sustain interest during October. It not only sustained but accelerated.

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