While the Fed jumped into the unfolding crisis with both feet, investors have been nervously awaiting the details of a fiscal stimulus package out of Congress, and we finally got one yesterday evening. With the $2 trillion package agreed to but still awaiting formal passage, the risk-on mood was strong with stocks anticipating the deal and bouncing back in a big way with the Dow posting its biggest percentage gain (11.37%) since 1933. Treasuries, however, while suffering some selling, were not severely impacted which reflects continuing uncertainties over the damage the virus will exact as cases are expected to peak over the next two weeks in certain urban areas (see New York City). The mood this morning is a little more hesitant with Treasuries near unchanged and equities expecting a flattish open. While the president wants to “reopen the economy” around Easter, until new cases peak and start to recede, and universal testing becomes a fact and not fantasy, social distancing measures seem the best course to navigate this health and economic crisis.
It’s been a wild week in all corners of financial markets but none more so than the MBS market. Last week, yields blew out and spreads widened as all manner of investors were swamped with redemption requests, and margin calls. That selling pressure came despite the Fed stepping into the MBS market after the Sunday emergency rate cut and resumption of QE. The REIT market was hit with redemptions as nervous investors assumed defaults and foreclosures were bound to head higher and leveraged holders were hit with margin calls which further exacerbated the selling . This week has brought a measure of calm (it’s all relative at this point), especially with the Fed pledging unlimited QE and apparently meaning it. The Fed’s pace of weekly agency MBS purchases is now running at eight times the highest level seen in any prior QE. This week’s aggregate purchase target of $250 billion in agency MBS is unprecedented and compares to last week’s $67 billion. Prior to that, the highest weekly total for Fed purchases was $33 billion in March 2009. The unprecedented level of buying has calmed the mortgage market and tightened spreads, but they still sit at high levels, at least in the 30yr space. 15yr spreads, however, as shown below have actually tightened through the prior week’s dislocation stemming from virus fears.
Muni Market Has Some of the Best Yields in Years
We showed the below graph of the AAA-rated municipal market last week but wanted to return to it as the level of volatility has continued making current yields extremely enticing. The graph shows the AAA-rated yield scale from March 2 (blue line) to yesterday (red line). As shown, yields have risen from 183bps to 212bps this month as individual investors raised cash through mutual fund redemptions and other investors left with concerns over financial viability of municipalities in the wake of the virus. For bank investors, a 5yr maturity can yield 3.50% on a tax-equivalent basis and a 10yr maturity can yield 3.80%. This indiscriminate/panic selling has created the best yields in years, and remember these are AAA-rated, general obligation issues.
Copper/Gold Ratio & 10yr Treasury Yield
While it looks like the eye of the coronavirus hurricane is about to sweep over the U.S., trying to guess its impact on yields is probably a fools game but we thought we’d drag out an old favorite: the Copper/Gold Ratio vs.10yr Treasury yield. Copper is a good leading economic indicator while gold tends to rise in times of uncertainty and stress (like now). As shown, the two series track fairly closely over the years and while 10yr Treasury yields are well below 1%, that level seems to be confirmed by the weakening in the Copper/Gold ratio. Keep an eye out for any turn in the ratio as an indicator of when Treasury yields may lift as well.
Agency Indications — FNMA / FHLMC Callable Rates
|Maturity (yrs)||2 Year||3 Year||4 Year||5 Year||10 Year||15 Year|