October 15, 2019
Treasury yields increased sharply last week in a nearly parallel fashion. Everything considered, it looked like yields reacted to a market perception of less overall risk. Yields on maturities 2-years and longer increased by 18-21 bps, reversing (and then some) the decline in yields from the prior week. Most of the push higher in yields came later in the week though as yields closed virtually unchanged from the prior week through Tuesday of last week.
The increase in yields kicked off Wednesday morning as China reportedly remained open to a partial trade agreement even though the U.S. blacklisted Chinese companies and blocked visas for officials it believes are involved in human rights violations. On Thursday, yields took off again as President Trump tweeted he would meet with China’s vice premier on Friday as well as Closing out the week, a messy Brexit looked less likely, previously announced tariffs were suspended, and President Trump cited a “substantial phase one deal” had been reached.
Yields over the past two weeks have behaved in an “easy come, easy go” fashion. So, it makes sense investors took advantage of the increase in benchmark yields as activity was strong later in the week. Over the long holiday weekend, some of the luster surrounding the trade deal has faded sending yields down 1-2 bps on maturities 2-years and longer this morning.
Weekly Spread Commentary
- Curve steepened by 1 bp measured by 2s-10s.
- Agency Bullets tightened 1-2 bps.
- Agency Callables tightened by 8-12 bps.
- Corporates tightened by 8-13 bps.
- Munis widened at 5-, 10-, and 15-year maturities by 8, 11, and 13 bps respectively.
- CMOs were 2 bps tighter.
- MBS were wider with the 15-year +4 and the 30-year +2 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 (September) | Monthly, 10th business day
“Yields on U.S. government debt have swung sharply in recent weeks. The 10-year yield, a key reference for corporate and individual borrowing costs, fell to a three-year low of 1.456% last month, dragged down by increasing fears of an economic slowdown. Signs of U.S. economic strength then sent the yield to its biggest weekly gain in six years before it stabilized within a relatively narrow range.”
“Mr. Bullard dissented against the Fed’s rate cut in September because it was smaller than he would have liked. The Fed is broadly expected to lower rates again when it meets at the end of the month, but officials haven’t been giving strong guidance that they are on board with such an action.”
Adjustable Rate Mortgage Market Update
Demand for new-issue hybrid ARMs slowed, which resulted in yield spreads to Treasurys widening 1 to 2 basis points last week. Hybrid ARM spreads tightened in September, but they’ve widened out in October bringing spreads back to multi-year wides.Continue Reading
Agency Market Update
Agency bullets with maturities of 2 to 3 years tightened by a basis point last week and bullets with maturities between 5 and 10 years tightened by 2 basis points. Callables tightened in more significantly with last week’s selloff, with some tenors tightening by double-digit basis points.Continue Reading
Fixed Rate Mortgage Market Update
Yield spreads for current-coupon MBS to Treasurys widened last week as trade optimism drove Treasury yields higher. 30-year MBS widened by 2 bps to 105 bps, while 15-year increased 4 bps to 72 bps.Continue Reading
Municipal Market Update
Municipal prices started the week mixed, were stronger on Tuesday, mixed again on Wednesday and Thursday, and weaker on Friday. New issue offerings are forecasted to be $12.37B for the trading week.Continue Reading
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. Many floating-rate bond options currently offer similar and even higher yields than longer duration fixed-rate bonds, driven by a flat to inverted yield curve between 3-month and 10-year Treasurys. These curve points have been inverted since May, but have recently steepened and are currently 6 bps positively sloped.Continue Reading
CMO Market Update
Last week’s CMO update focused on the Monthly Trade Summary, which noted the uptick in VADM activity seen during September. Investors typically consider VADMs to limit extension risk. While economic projections still favor additional Fed easing, it is less expensive to prepare for risk in advance.Continue Reading