Sector Update

September 9, 2019

Last week, the yield curve steepened as maturities 2 years and longer increased in yield by 3-7 bps while shorter maturities declined by 3 bps. The curve, measured by the much-watched spread between 2- and 10-year maturity Treasurys, closed out the week back in positive territory, barely. It didn’t come easy though as the holiday-shortened week started off with a broadly-weak ISM Manufacturing Index reading. The real up-trend in yields was largely started by yet another (I’ve lost count at this point) round of trade talks scheduled to occur in “early October”. Also, on Thursday, the ISM’s Non-Manufacturing Index posted a better-than-expected reading and helped propel yields higher.

Other big news last week was the Treasury’s release of their Housing Reform Plan on Thursday. It’s a relatively short 45-page read which I can best liken to “having a meeting about a meeting”. We are working on a Strategic Insight for release later this week.

If you follow along in the Market Today or Weekly Recap, we have important economic readings this week regarding inflation, an ECB policy decision, and retail sales. None of which are likely to alter what the Fed is thinking, and the market seems confident in a 25 bps cut next week. We only have Twitter to contend with this week as there are no Fed speakers on tap during their quiet period leading up to their meeting next week.

This morning, yields opened 2-3 bps higher across the curve. It seems they are reacting to higher yields in the Eurozone as the likelihood of the ECB enacting quantitative easing and/or scaling up future asset purchases have declined.


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 (August) | Monthly, 5th business day

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


WSJ: How Fannie and Freddie Have Changed Since the Crisis

“Today, Fannie and Freddie look a lot like the mortgage market at large. Many of the mortgages they buy are made by nonbanks, which are less regulated than their bank counterparts.”


U.S. Department of the Treasury: Housing Reform Plan

“This plan addresses this last unfinished business of the financial crisis in a way that preserves what works in the current system, protects taxpayers, and reduces the influence of the Federal Government in the housing finance system.”

Sector Updates

Adjustable Rate Mortgage Market Update

Last week, demand for new-issue hybrid ARMs improved, which resulted in yield spreads to Treasurys tightening 2 to 3 basis points.  Spread tightening found in the hybrid ARM sector was mirrored in the fixed-rate MBS sector as 15-year and 30-year fixed-rates tightened 2 and 6 bps, respectively.

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Agency Market Update

Spreads on agency bullets and callables tightened in marginally last week, with the sharpest moves coming on the longer end of the curve.

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Fixed Rate Mortgage Market Update

Yield spreads for current coupon MBS to Treasurys tightened during last week’s bond market sell-off, with 15-year tightening by 2 bps to 62 bps, while 30-year contracted 6 bps to 89 bps. However, higher coupons were largely unchanged on the week.

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Municipal Market Update

Municipal prices were steady on Tuesday and Wednesday, weaker on Thursday, and steady again on Friday. New issue offerings are forecasted to be $10.07B for the trading week.

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SBA Market Update

The September fixed-rate DCPC auction included 10-year, 20-year, and 25-year maturities. Issuance increased and spreads widened in September for all maturity terms compared to the prior month. 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

Last week saw mixed movement in Treasury yields and little change in CMO spreads. It is still worth noting that CMO spreads are one of few places where spreads have actually widened on a year-to-date basis. We are seeing increased CMO activity as investors look for yield in a sector with comparatively wide spreads.

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