September 30, 2019
This week, we are taking a look back as we close out the third quarter. At the conclusion of the 2nd Quarter, we wrote of headwinds including the lack of a trade deal with China (check), weakening global economic activity (check), and a “doveish” Fed (check). With these headwinds on prominent display during Q3, yields closed out the third quarter 13-40 bps lower on maturities greater than 2 years and, save a wild ride today, will have declined for four consecutive quarters. In response, the Fed cut their target rate twice for a total of 50 bps, their only adjustments so far this year. Finally, the curve flattened by most measures; notably, the 2s-10s tightened by 20 bps moving from +25 to +5, backing off a daily low of -5 reached on August 27th.
Moving forward, I still think a trade deal, or lack thereof, will continue to drive markets. All else equal, economic data, whether stronger or weaker, will hopefully prevail over rhetoric. Other factors likely to drive yields in the 4th Quarter include impeachment hearings and global political instability including, but not limited to, Iran and Hong Kong.
A Look Back at “What We’re Reading” Articles from Q3 2019
(6-28-2019) WSJ: Treasury Yields Decline for Third Quarter in a Row
“The moves have come amid an escalating trade war between the U.S. and China that is pushing the world’s largest central banks—including the Federal Reserve—toward a looser monetary-policy stance as they fight to support flagging growth.”
(7-14-2019) WSJ: As Banks Report Earnings, Fed Looks to Take Away the Punch Bowl
“Big banks start reporting second-quarter earnings Monday, and investors will be closely watching for signs of how much the Fed’s change in rate policy could hurt the banking business.”
(8-11-2019) WSJ: Investors Ponder Negative Bond Yields in the U.S.
“Now, though, there is more than $15 trillion in government debt around the world with negative yields. That means, essentially, that savers holding these bonds are paying the government to store their money.”
(8-31-2019) Bloomberg: Gut Check Time for Treasuries After Biggest Rally Since 2008
“The rally that swept through the Treasury market in August is the strongest since the depths of the 2008 crisis. This insatiable demand for the safety of bonds faces a reality check in the days ahead.”
(9-13-2019) 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.”
“While the British experience weakens the reliability of a yield-curve inversion as a recession indicator, it doesn’t make it a useless bellwether. It can indicate a slowdown even when that doesn’t develop into a recession, as was the case in 2000. Americans shouldn’t ignore the inverted yield curve: Even if it doesn’t presage a storm, bad weather may still be on the way.”
3rd Quarter 2019 Spread Commentary
- Agency Bullets tightened 3-7 bps.
- Agency Callables tightened 3-12 bps. Longer lockouts tightened more.
- Corporates tightened on the short end by 13 bps and widened on longer maturities by 4 bps.
- Munis were virtually unchanged on the short end and 10-22 bps wider on longer maturities.
- CMOs were 5-7 bps tighter at 5-year maturities and unchanged elsewhere.
- MBS were wider; 15-year by 17 bps and 30-year by 15 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 (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.”
“Fannie will be permitted to retain earnings until its capital buffer hits $25 billion, while Freddie will be allowed to hold $20 billion, the Treasury Department and the Federal Housing Finance Agency announced Monday. Last year, Fannie reported net income of $16 billion and Freddie made $9.2 billion, signaling it could take more than a year for the companies to reach the administration’s new goal.”
Adjustable Rate Mortgage Market Update
Last week, yield spreads between hybrid ARMs and Treasurys were mixed with Ginnie 2s widening approximately 2 to 3 basis points and conventionals tightening approximately 1 or 2 basis points. Mortgage-related sectors were also mixed with 15-year fixed-rate mortgages tightening 1 basis point and 30-year fixed-rate mortgages widening 2 basis points.Continue Reading
Agency Market Update
Agency bullets widened versus Treasurys last week while callable spreads were mostly unchanged. Bullets continue to trade near their multiyear average spreads while callables remain on the wider end of the recent trading range.Continue Reading
Fixed Rate Mortgage Market Update
Yield spreads for current coupon MBS to Treasurys were mixed last week as the overall Treasury market moved higher in price. 30-year MBS widened by 2 bps to 100 bps, while 15-year tightened 1 bp to 68 bps.Continue Reading
Municipal Market Update
Municipal prices strengthened on Monday and Tuesday, were steady on Wednesday, mixed on Thursday and steady again on Friday. New issue offerings are forecasted to be $9.26B 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
CMO spreads were mostly unchanged from July through September. There was movement week to week, of course, but ultimately spreads landed about where they began the third quarter. The one exception was the 5-year space, where PACs and Sequentials tightened 5 and 7 basis points, respectively.Continue Reading