Sector Update

October 5, 2020

Treasury yields increased in a steepening fashion last week with longer maturities increasing by 4-9 bps and shorter maturities relatively unchanged. The 2-10 spread closed last week 4 bps higher at 57 bps. The greater likelihood of additional stimulus measures along with polls suggesting a less rocky election than expected seem to be pushing Treasury yields higher. The 2-10 is currently at 61 bps which is the highest level since June 9^th.

This Morning

Stocks, gauged by S&P 500 Index, broke a four-week losing streak last week and ended up 1.5%. Even with the recent weak showings, the S&P 500 ended the 3^rd Quarter up 8.5% and had the best two-quarter stretch dating back to 2009. So far this morning, equities are showing strength and are up 1.3 – 1.6%. Last week’s steeper increase in Treasury yields has carried over and the curve continues to steepen. The 2-10s is 4 bps higher from the Friday close, currently 61 bps.

Food for Thought – MBS Prepay Speeds Released Tomorrow Evening

Prepay speeds for Agency MBS will be released tomorrow evening and we’ll have commentary available Wednesday afternoon. As a precursor to the release, I wanted to share two tables included in the commentary to give a sense of where we are (and were) headed into the release.

First, mortgage rates continue to hover right around lows for the year which are also all-time record lows in the history of the Freddie Mac Primary Mortgage Market Survey (PMMS).

Second, here is a table looking back and forward at market measures that affect a specific month’s prepayments. Obviously, as mortgage rates fell this year prepayments picked up. At a high level, prepayments have remained elevated for the past 5-6 months. Looking forward, it appears this will be the case for the remainder of the year save some potential seasonality effects. Given tight inventory, lack of new construction, and pent-up demand from this Spring, this Winter could be stronger than usual though.

Sector Commentary

Government/Agency Space
- Bullets essentially unchanged, 10-year 1 bp tighter
- Callables unchanged on the week, trading near pre-pandemic spreads
- Bullets are good candidates for harvesting gains and/or repositioning for Q4-2020

Agency CMBS, MBS, and ARMs
- SBA DCPCs 8 bps wider on the week
  - October DCPC auction is this Thursday, expect to draw significant investor attention

Agency MBS wider, 15-year 5 bps tighter and 30-year 4 bps tighter
- Freddie Mac PMMS shows 30-Yr rate at 2.88 and 15-Yr rate at 2.56
- Mortgage applications (week ending 9/25) down 4.8%
  - 9% drop in purchase apps. and 6.5% decline in refinances

Agency CMOs were unchanged across the board
- In fixed-rate, low coupon cuts continue to see most activity
- September Monthly Trade Summary next week

Municipals
- BQ Munis, 5-year 8 bps tighter, 10-year 11 bps tighter, 15-year 7 bp tighter
  - BQ participants continue to focus on new issues
- GM Munis, 5-year 2 bps tighter, 10-year 4 bps tighter, 15-year 7 bps tighter
- Taxable Munis, 5-year unchanged, 10-year 1 bp tighter, 15-year 7 bps tighter

Corporates
- A-Rated Corporates, unchanged on the week

Vining Sparks Interest Rate Products
- Desk activity brisk going into quarter-end
- Led by commercial loan hedging and investment portfolio hedging
  - Investment portfolio hedging primarily “DIY Muni hedging”

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 (September) | Monthly, 5^th business day

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

WSJ: America’s Main Street Revival Goes Into Reverse, Cutting a Small-Town Lifeline

“ESB Financial, a 119-year-old community bank, originated roughly $18 million in federal Paycheck Protection Program loans over the summer. ‘The stress is going to come nine to 24 months down the road,’ said Michael Black, an executive vice president with the bank.”

Vining Sparks: Coronavirus Chartbooks

PDF/Mobile: Coronavirus Chartbook (PDF)

Regulatory Links

Fannie Mae: 9/30 Fannie Mae Extends Timeframe for Single-Family MBS Delinquent Loan Buyout Policy

Ginnie Mae: 9/24 Notification regarding Loans after Deferment Loss Mitigation

FHFA: 9/24 Extends Buying Loans in Forbearance & COVID-Related Loan Processing Flexibilities

Ginnie Mae: 9/21 Ginnie Mae Announces Pooling Restrictions for LIBOR-based Adjustable-rate Mortgages

FDIC: 9/18 Results of Summary of Deposits Annual Survey

Federal Reserve: 9/16 Federal Reserve issues FOMC statement

LIBOR Transition Links

ARRC 9/30: August – September ARRC Newsletter

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