Market Update provided by Rheim Penman

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Mortgages loans took a beating yesterday into the sell-off as they underperformed 3-4 bps versus their treasury counterparts.  Up-in-coupon continues to feel the most pressure as we saw lenders move their hedge coverage from 3.5s to 4.0s with note rates changing execution.  FNCL 4.0 for April settle closed yesterday at 103-26 and have sold off over 20/32nds on the week with yesterday alone responsible for over 10/32nds.  Trust IO has risen into the sell-off as the interest only component on vintage bonds have become more valuable.

It was a bad day for fixed income while stocks were mostly unchanged on the day.  The yield on the 10-year treasury rose to 2.59% and is bumping up against 2.60%, the level Bill Gross suggested triggers a bear market in bonds.  Oil dropped over 2% to close at $49.28 a barrel, the lowest level since November as the OPEC cuts are doing little to constrain US reserves.  Mario Draghi, the ECB president, spoke yesterday highlighting that the euro economies have strengthened and confirmed stimulus will continue with further cuts in interest rates unlikely.

Market update provided by Rheim Penman

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Mortgages outperformed treasury hedges by ~1+/32nds on ~2.5B of origination; demand came from fast and real money.  On the day, FN30 3.5 finished -8/32nds to 102-00 and FN15 3.0 was +1/32nds to 102-16.  The GD/FN 3.5 swap came in -0.5/32nds day over day to settle at -1+/32nds.

Conventional 30 year March/April rolls began trending lower on Tuesday with the Federal Reserve speakers being hawkish on rate hikes.  Rolls held relatively firm yesterday as we move into today’s first big day for Class A settle activity.  The FN30 3.5 roll came off -0.25/32nds to 5.625/32nds and the FN30 4.0 roll was back -0.125/32nds to 5.875/32nds at the close on Wednesday versus Monday’s levels.

The Federal Reserve’s Beige Book was released yesterday indicating the economy is growing “at a modest to moderate pace”, continuing the trends of the last release and the overall recent economic data prints.  In addition, Fed Governor Lael Brainard was also leaning toward a possible rate hike with comments indicating a “removal of accommodation is likely to be appropriate”.  This data coupled optimism seen earlier this week, the markets are now pricing in an approximate 86% chance of a rate hike in March.  The 10 year yield increased with the Fed speakers leaning to a likely rate hike in March, as well as yesterday’s economic data showing an increase in inflation (closer to the Fed’s targeted 2%).

Equities reach another all-time high yesterday as markets reacted to Trump’s speech, and seemingly increased confidence in the strength of the economy.  The Dow rallied over 303 points to finish the day 21115.55 and the S&P 500 had a record day moving +32.32 points to close at 2395.96.

 

Bonds ended down on the day with data supporting growth in the U.S. economy.  Treasuries sold off with rate hike bets becoming more of a reality; the 10 year yield rose for the third day in a row, +7bps to end the day at 2.46%.

Market Update provided by Rheim Penman

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Mortgages underperformed their treasury hedges by ~1 tick (wider) on approximately $2.6B in origination.  The 3.5% coupon continued to be well supported with real money beginning to move up in coupon as we move into a higher rate environment.  Mortgages finished down on the day with FN30 3.5 closing down -10/32nds to 102-15+ and FN15 3.0 lower by -3+/32nds to 102-26.  The GD/FN 3.5 swap improved 0.75/32 to end at -1+/32, while 3.0s were unchanged on the day and the 4.0 swap was up marginally.

Yesterday was a quiet day ahead of tonight’s State of the Union address.  Stocks continued their record high closes on Trump’s promise of tax cuts, infrastructure spending and mass deregulation.  It’s shaping up to be a volatile month end with Trump’s address to Congress and odds of a rate hike in March moving up to 50% yesterday.  Federal Reserve Bank of Dallas head Robert Kaplan said in a speech yesterday that it is better to raise rates “sooner rather than later”.  In addition, yesterday’s economic releases continued to show strength in the economy with new orders for durable goods exceeding estimates, climbing 1.8% in January.  However, pending home sales declined as higher rates and higher home prices seem to be keeping some home buyers on the sidelines.

Equities finished up on the day, a new 12 day record high close; the S&P 500 closing +2.41 at 2369.75 and the DIJA ending +15.68 to 20837.44.  Given where equities are currently trading relative to expected earnings, some analysts believe the market may be signaling a correction is ahead of us.  If little to no details regarding Trump’s policies are revealed tonight, some expect investors to begin moving to safer assets.

 

Speaking of safer assets, treasuries were little unchanged from yesterday morning’s 2.317% opening mark, closing the day at 2.367%.