Sector Update

September 23, 2019



Last week was almost mirror opposite of the prior week; although, yields didn’t give back all their increases from the week before. Yields broadly declined with maturities 2 years and longer falling 11-21 bps while the curve flattened. The spread between 2- and 10-year maturity Treasurys closed out the week at 3 bps a decline of 7 bps week-over-week.

If you follow along in the Market Today or Weekly Recap, last week, markets grappled with the largest intraday gain in oil since 1991 along with a liquidity crunch in overnight funding markets. This, all before the Fed announced their 25 bp cut on Wednesday. This week there are a number of Fed speakers on tap which ought to provide some further insight to their thinking’s on monetary policy moving forward.

Over the weekend, it was reported that FHFA and Treasury are close to a deal allowing Fannie Mae and Freddie Mac to begin retaining earnings. Since Treasury released their housing reform plan on September 5th, they have moved aggressively on the administrative actions they can take in the absence of help from the legislative branch. As it stands, all profits (subject to a $3 Billion capital buffer) are swept to the Treasury. We recently wrote a Strategic Insight on the housing reform plan if you would like to learn more.

This morning, yields are 1-3 bps lower on maturities 2 years and longer. It appears weak data out of the Euro area is taking priority over the easing of trade concerns between China and the United States.

 

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 (September) | Monthly, 10th business day

 

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.”

 

WSJ: Fannie, Freddie Poised to Keep Profits in an Initial Privatization Move

“Under the forthcoming agreement, the companies would be allowed to retain about a year’s worth of profits, or about $20 billion, Mark Calabria, the Federal Housing Finance Agency chief, said in an interview after touring a senior center financed in part by the Federal Home Loan Bank of Indianapolis. FHFA oversees Fannie, Freddie and the Federal Home Loan Bank system..”


Sector Updates


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.  The 15-year fixed-rate mortgage saw spreads widen 4 basis points and the 30-year fixed-rate mortgage experienced spread tightening of 3 basis points.

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Agency Market Update

Spreads on agency bullets were basically unchanged last week while callables widened out after tightening over previous weeks.  Bullets continue to trade near their multiyear average spreads while callables remain on the wide end of the recent trading range.

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Fixed Rate Mortgage Market Update

Yield spreads for current coupon MBS to Treasuries were mixed last week as the overall Treasury market increased in price. Yield spreads on mortgage product remain at multi-year highs.

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Municipal Market Update

Municipal prices weakened on Monday and Tuesday, and strengthened daily for the rest of the week. New issue offerings are forecasted to be $5.57B for the trading week.

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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.

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CMO Market Update

Of the sectors we monitor, MBS and ACMOs are the only two to experience appreciable spread widening year-to-date. CMO spreads have widened roughly twice as much as MBS spreads, around 25-30 basis points in total depending on the length of the bond.

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