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.
- Every sector tightened this week, save MBS, which widened out past recent highs.
- Agency Bullet spreads tightened 1-2 bps this week.
- Agency Callables tightened 10-15 bps on the week.
- Corporates tightened 11-13 bps on the week, helped by thawing trade tension.
- Munis tightened by 19-20 bps across the curve. Given increased demand, it will be a test to see if tighter spreads hold.
- CMOs were unchanged to 2 bps tighter.
- MBS widened on the week; the 15-year by 3 bps and 30-year by 12 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 (September) | Monthly, 5th business day
SBA Prepay Commentary (August) | Monthly, 10th business day
“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.”
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.Continue Reading
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.Continue Reading
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.Continue Reading
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.Continue Reading
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.Continue Reading
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.Continue Reading