Sector Update

November 9, 2020

I never like to gloss over a prior week, an election one at that, and one where equity indices were up between 7-9%. The FOMC also met and continued to reiterate their message of maintaining an accommodative monetary policy stance. That being said, news out this morning on a potential COVID-19 vaccine (one with an estimated effectiveness of 90%) from Pfizer and BioNTech is rapidly affecting markets. A little perspective, according to the CDC, the MMR vaccine is 97% effective with two doses. Prior to this morning, the curve was flatter and yields lower on markets interpreting a lack of Democrat control of both the Presidency and Senate as a threat to “reflation”. The Treasury curve was 5 bps flatter last week as a result but is sharply higher this morning.

This Morning

Stocks, gauged by S&P 500 Index, ended two consecutive weeks of declines posting strong gains last week. As mentioned above, the potential prospects for a highly effective vaccine have stocks stretching their gains this morning. All three major U.S. indices are up 1.2% to 4.0%. The NASDAQ is lagging as some WFH (working from home) stocks are struggling. For example, Zoom Video Communications is down approximately 16% from the Friday close.  Treasury yields have surged, and the curve is steeper this morning. The 2-10s is 9 bps higher from the Friday close, currently at 76 bps.

Food for Thought – Insight Into Mortgage Refinance Activity

Freddie Mac recently released a quarterly data update on refinance activity in their universe. While I was reviewing it, I found two interesting things given our current environment that I wanted to point out.

First, it is no surprise that cash-out refinances will follow appreciation in home values. Among other things, notably risk tolerance, there must be equity in a home for a borrower to even consider removing it. Volumes, at least in this universe, are currently multiples less of where they were leading up to the Financial Crisis.

Second, Freddie Mac also looks at what they refer to as “Product Transition”. Essentially, what type of loan transition occurs (if any) when a borrower refinances their loan. Here’s how to interpret the graph below. Looking at borrowers who had a 30-year fixed rate mortgage (FRM 30yr), 71% refinanced into the same product, 10% dropped down to a 20-year, and 19% dropped down to a 15-year.

Sector 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 (October) | Monthly, 10th business day

WSJ: Pfizer’s Covid-19 Vaccine Proves 90% Effective in Latest Trials

“The timetable suggests the vaccine could go into distribution this month or next, though U.S. health regulators have indicated they will take some time to conduct their review. Then it will take months for the companies to make enough doses for the general population.”

Vining Sparks: Coronavirus Chartbooks

PDF/Mobile: Coronavirus Chartbook (PDF)

Regulatory Links

FDIC: 11/6 Interagency Statement LIBOR Transition for Loans (FIL-104-20)

Federal Reserve: 11/5 Federal Reserve issues FOMC statement

Federal Reserve: 10/30 Federal Reserve Board adjusts terms of Main Street Lending Program

Fannie Mae: 10/30 Fannie Mae Issues Inaugural Multifamily and Single-Family SOFR ARM MBS

FDIC: 10/29 Agencies Propose Regulation on the Role of Supervisory Guidance

FHFA: 10/20 Temporary Policy Allowing Purchase of Qualified Loans in Forbearance Extended

FDIC: 10/20 Temporary Relief from Part 363 Audit and Reporting Requirements (FIL-99-20)

FDIC: 10/20 Net Stable Funding Ratio (FIL-98-20)

LIBOR Transition Links

ARRC 10/15: FAQs — Updated 10/15/2020

ARRC 9/30: August – September ARRC Newsletter

ARRC 8/27: Recommended Hardwired Fallback Language for Bilateral Business Loans

ARRC 8/18: Transition Resource Guide for ARM and Private Student Loans

ARRC 8/7: ARRC Releases the SOFR Starter Kit

ARRC: Link to all ARRC Announcements

ARRC: Link to all ARRC Publications

ARRC: Link to ARRC Fallback Contract Language

Fannie Mae: LIBOR Transition Webpage

Freddie Mac: LIBOR Transition Webpage

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