Sector Update

September 16, 2019



Whoa (or is it woah?), last week was more volatile than most expected leading up to the Fed announcement this week. Yields broadly rose with maturities two years and longer increasing in yield by 26-34 bps! The curve also steepened by a number of measures (see Curve Trades in Spread Snapshot below). The spread between 2- and 10-year maturity Treasurys closed out the week at 10 bps an increase of 8 bps week-over-week.

One of the more interesting, but perhaps less watched, moves came between the 3m-2y difference which increased by 25 bps last week. Two-year Treasury yields increased by 26 bps last week (largest move since 2009) while 3-month T-Bills only increased by 1 bp. Three-month yields are virtually anchored to what the market expects the Fed to do this week. With Fed Funds currently at 2.25%, and the market expecting a 25 bp cut, a yield of ~ 2% makes sense for 3-month T-Bills. On the other hand, two-year Treasury yields, among other things, have expected future Fed moves in mind. The steepening of the gap between the 3m-2y indicates market participants expect fewer/lower rate cuts than previously expected.

If you follow along in the Market Today or Weekly Recap, the Fed’s meeting this week almost certainly brings a 25 bp cut in the Fed Funds target rate. However, the prospects of further cuts have decreased, and much attention will be paid to how their statement is phrased.

This morning, yields are 4-5 bps lower on maturities two years and longer. They are reacting to the attack on Saudi oil processing capabilities this weekend and what reprisals, if any, will look like.

 

Spread 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 (September) | Monthly, 5th business day

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

 

WSJ: Surge in Treasury Yields Highlights Easing Economic Worries

“U.S. government bond yields posted their biggest weekly advance in more than six years, rising for five consecutive sessions after signs of a thaw in trade tensions eased fears about the direction of the economy.”

 

Vining Sparks: Strategic Insight: Housing Finance Reform Plan

“The only thing certain about this plan is that it will change. Right now, given the low probability of legislative action, we think investors’ time is best spent focused on potential administrative changes.”


Sector Updates


Adjustable Rate Mortgage Market Update

Yield spreads on hybrid ARMs to Treasurys tightened up to 10 basis points last week, despite most mortgage-related sectors experiencing some degree of spread widening. We continue to see relative value in longer-reset 7/1s and 10/1s as they remain approximately 32 and 37 bps wider, respectively, compared to levels in early March.

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Agency Market Update

Spreads on agency bullets and callables tightened in last week with the market selloff, and the sharpest moves again occurred on the longer-end of the curve. Bullets tightened in by 1 to 2 basis points, while callables of nearly all maturities and structures tightened by double digits.

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Fixed Rate Mortgage Market Update

Yield spreads for current-coupon MBS to Treasurys widened with the market sell-off, with 30-year widening by 12 bps to 101 bps, while 15-year increased 3 bps to 65 bps. Yield spreads on mortgage product remain at multi-year highs, despite the recent backup in rates.

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Municipal Market Update

Municipal prices for the week weakened daily across the curve. New issue offerings are forecasted to be $10.32B for the trading week.

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SBA Market Update

Yield spreads for fixed-rate DCPC pools are currently tighter than the twelve-month average for the longer terms and are trading at tight spreads levels compared to the previous twelve months. 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.

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CMO Market Update

Yields for intermediate and longer maturity Treasurys increased by more than 30 basis points. And yet CMO spreads tightened only marginally. 5-year PACs and Sequentials gave up 2 basis points of spread. Spreads for 10-year bonds tightened by 1 basis point.

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