October 7, 2019
Opening the 4th Quarter last week, treasury yields declined sharply and in a steepening fashion as 2-5-year maturities declined by 21-22 bps and 7-year + maturities declined by 11-18 bps. To add some perspective, I’ve included a snippet below looking at quarterly changes in Treasury yields. For example, during Q3 2019 5-year Treasury yields declined 22 bps. Last week alone, they declined 21 bps.
Yield declines were ushered in on the back of poor economic data last week from the ISM surveys and slumping manufacturing and non-manufacturing PMI reports. Also, while unemployment fell to a 50-year low, wage gains declined. To the extent markets perceive trade (manufacturing) concerns are creeping into the larger U.S. economy, it makes sense for yields to decline. To that end, expectations of a Fed rate cut at their October meeting increased last week from just 40% to 78% as the week played out.
This morning, yields are 1-3 bps higher on maturities 2-years and longer. Important items to keep an eye on this week include inflation readings on Tuesday (PPI) and Thursday (CPI), comments from Fed Chair Powell on Tuesday and Wednesday, and most likely to drive markets as usual, you guessed it, another round of trade talks with China (including the posturing leading up to the meeting) scheduled to occur on Thursday and Friday.
Weekly Spread Commentary
- Curve steepened by 7 bps measured by 2s-10s.
- Agency Bullets were unchanged save the 2-year tightened by 1 bp.
- Agency Callables widened by 5-10 bps.
- Corporates widened by 2-3 bps.
- Munis widened at 5-, 10-, and 15-year maturities by 21, 15, and 6 bps, respectively.
- This largely leaves BQ yields unchanged week-over-week in the face of a Treasury rally.
- CMOs were 3 bps wider at 5- and 10-year maturities.
- MBS were mixed with the 15-year unchanged and the 30-year 3 bps wider.
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, 5th business day
SBA Prepay Commentary (September) | Monthly, 10th business day
“Berliner Volksbank, the country’s second-largest cooperative lender, started to apply a minus 0.5% rate on deposits exceeding 100,000 euros ($110,000) in its first charge for retail clients. The move may encourage other lenders to follow suit, with both Deutsche Bank AG and Commerzbank AG signaling that they’re warming to the idea.”
Adjustable Rate Mortgage Market Update
Demand for new-issue hybrid ARMs slowed, which resulted in yield spreads to Treasurys widening 2 to 4 basis points last week. We continue to see relative value in longer-reset 7/1s and 10/1s as they remain approximately 36 bps wider compared to levels in early March.Continue Reading
Agency Market Update
Agency bullets with maturities of 2 to 3 years tightened by a basis point last week while callable spreads mostly widened with the rally. Call volume nearly tripled last week to $6.9 billion, and holders of callable paper can likely continue to expect elevated call volume in their higher coupon issues.Continue Reading
Fixed Rate Mortgage Market Update
Yield spreads for current coupon MBS to Treasuries were mixed last week as the overall Treasury market continued its run higher in price. 30-year MBS widened by 3 bps to 103 bps, while 15-year held firm at 68 bps.Continue Reading
Municipal Market Update
Municipal prices started the week steady, were mixed on Tuesday and prices strengthened daily for the rest of the week. New issue offerings are forecasted to be $6.42B 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 an inverted yield curve between 3-month and 10-year Treasurys.Continue Reading
CMO Market Update
This week, we will examine the September Trade Summary. The one notable change month-over-month was VADM activity, accounting for 14% of trades. While this isn’t a huge number, it does exceed what we’ve seen for the previous four months.Continue Reading