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
- 3m to 2s closed at a positive spread (3bps) for the first time since mid-March.
- 2s to 10s Treasury curve slope 2 bps tighter to 16 bps.
- Agency Bullets unchanged on the week.
- Agency Callables, shorter maturities unchanged to 3 bps tighter. Longer maturities 3-4 bps wider.
- Corporates tightened by 1-3 bps.
- BQ Munis widened by 1 bps for 5-year maturities and tightened by 5 bps at 10- and 15-year maturities.
- GM Muni spreads were -17 bps at 5-year, +3 bps at 10-year, and -5 bps at 15-year.
- Taxable Munis were steady on the week.
- CMOs were unchanged to 1 bp tighter.
- MBS were tighter for 15-year by 3 bps and 30-year by 7 bps.
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
“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.”
“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.”
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.Continue Reading
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.Continue Reading
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.Continue Reading
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.Continue Reading
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.Continue Reading
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.Continue Reading