October 28, 2019
For the third consecutive week Treasury yields moved higher, with much of the selloff occurring Friday following positive news on the U.S.-China trade front. Uncertainty over Brexit remains, but the U.K. Parliament agreed on the broad principles of a Brexit deal last week while voting to delay an official vote, and this morning the E.U. agreed to an extension until the end of January. Yields on sovereign debt ended Friday higher by 4 to 6 basis points for maturities of 2 to 10 years. Despite heightened geopolitical uncertainties, stocks are trading at all-time highs this morning and Treasury yields are up another 4 to 6 basis points on strong earnings reports and continued trade deal optimism. With yields at the highest levels since mid-September but the overall trend for bond yields still pointing decidedly downward, bond buyers will likely look to take advantage of what could prove to be a temporary buying opportunity.
This week is jam-packed with economic data releases, with the bigger headline releases on Wednesday (Q3 GDP initial estimate), Thursday (September PCE inflation), and Friday (October jobs report). And not to be overlooked, the FOMC concludes their October meeting on Wednesday and, according to Fed Funds futures, the market is pricing in better than a 90% chance of the third 25 basis point cut of the year. The overall tone of these Fed rate cuts has been that they are of the “insurance” variety rather than full-blown “emergency” cuts, but for what it is worth, the market is still pricing in a good chance of at least another 25 basis point cut in 2020. It appears that with little room between the current overnight target rate and the presumably zero lower bound, the Fed is attempting to be proactive rather than reactive in setting monetary policy to sustain the current expansion.
Weekly Spread Commentary
- 2s to 10s Treasury curve slope unchanged at 18 bps.
- Agency Bullets unchanged on the week.
- Agency Callables tightened by 1-7 bps, with the biggest move in shorter lockouts.
- Corporates tightened by 1-2 bps.
- Bank Qualified Munis tightened by 11 bps for 5-year maturities and widened at 10- and 15-year maturities by 3 bps.
- CMOs were 1-4 bps wider.
- MBS were tighter for 15yr by 1 bp and 30yr widened by 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 (October) | Monthly, 10th business day
“Buckle up. This week is a triple header of major economic news in the U.S.: the first read of third-quarter economic growth, a policy statement from the Federal Reserve and October’s jobs report.”
Adjustable Rate Mortgage Market Update
Yield spreads on hybrid ARMs to Treasurys tightened 1 to 2 basis points last week, while most mortgage-related sectors experienced a mixture of spread tightening and widening.Continue Reading
Agency Market Update
Agency bullets mostly moved in line with Treasurys, while callables largely tightened on the week. The more significant tightening in callables appeared to be in 3-year maturities with 3-month lockouts.Continue Reading
Fixed Rate Mortgage Market Update
Yield spreads for current coupon MBS to Treasurys were mixed last week. 30-year MBS widened by 2 bps to 107 bps, while 15-year tightened 1 bp to 70 bps.Continue Reading
Municipal Market Update
Municipal prices started the week weaker, were mixed on Tuesday, and steady daily for the rest of the week. New-issue offerings are forecasted to be $7.69B for the trading week.Continue Reading
SBA Market Update
The October fixed-rate DCPC auction included 20-year and 25-year maturities. Total issuance declined and spreads widened in the October auction compared to the prior month. 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.Continue Reading
CMO Market Update
Nominal spreads for Agency CMOs have widended marginally since our last update on October 15. In that time, yields have increased 5-6 basis points for the 3, 5, and 10-year Treasurys. This leaves CMO spreads at or near the high end of their range for 2019.Continue Reading