Uncooperative Inflation Indices
Ginnie Mae Project Loan News

Uncooperative inflation indices — The much-anticipated February Consumer Price Index (CPI) report, released last Tuesday, and the Producer Price Index (PPI) report, released last Thursday, threw more cold water on the market’s desire for interest rate cuts. CPI was +0.4% month-over-month (MoM), which matched expectations, but was an increase from the January pace of +0.3%. The PPI jumped even more to +0.6% MoM, double the +0.3% expected (which also matched the rate of increase in January).

Taken together, the February prints illustrate why central bankers remain wary of easing policy too soon. Federal Reserve (Fed) Chair Jerome Powell suggested last week that he and his colleagues are getting close to the level of confidence they need to start lowering rates. Yet some Fed officials have also expressed a desire to see a broader pullback in prices first. “We’re waiting to become more confident that inflation is moving sustainably at 2%,” Powell said Thursday, while answering questions from the Senate Banking Committee. “When we do get that confidence—and we’re not far from it—it’ll be appropriate to begin to dial back the level of restriction.”

Some Fed presidents, however, are seemingly trying to push the goalposts back to avoid cutting rates too quickly. For example, Richmond Fed President Thomas Barkin stated in a speech last week: “I am hopeful but still looking for more conviction that the slowing of inflation is broadening and sustainable.” Boston Fed President Susan Collins echoed this point last Wednesday: “Seeing sustained, broadening signs of progress should provide the necessary confidence I would need to begin a methodical adjustment to our policy stance.”

The takeaway: The story hasn’t changed. Inflationary pressures are subsiding, but still pose a threat to the Fed’s goals. Nevertheless, the Fed continues to maintain that it will be appropriate to lower rates at some point this year if the economic data cooperates. Indeed, the aforementioned February data did little to dissuade investors from continuing to view the June meeting of the Federal Open Market Committee (FOMC) as the most likely initial rate cut in this interest rate cycle. The chart below—covering the MoM change in headline CPI from January 2021 through February 2024—shows that inflation has slowed significantly since summer 2022.

Trading Desk Talk - Tdt 3.18.24 2
Source: Bloomberg, Bureau of Labor Statistics

Ginnie Mae project loan (GNPL) news —
The following excerpt is from the Federal Deposit Insurance Corporation’s (FDIC) 2023 annual report:

FDIC GUARANTEED DEBT OF STRUCTURED TRANSACTIONS In January 2024, the FDIC, as receiver for Silicon Valley Bridge Bank, N.A. (SVBB), used structured transactions to sell $10.5 billion of Ginnie Mae Project Loan Securities and a $36.1 billion Purchase Money Note (PMN) issued by First-Citizens Bank & Trust Company (FCB). The PMN is supported by a pool of loans acquired by FCB through the receivership and sale of SVBB. The trusts facilitating these structured transactions issued Notes totaling $43.3 billion that were sold to the FFB [Federal Financing Bank]. Estimated asset recoveries from these structured-transaction assets were used to derive the allowance for credit loss on the DIF’s [Depositors Insurance Fund] receivable from the SVBB resolution and the related special assessments receivable as of December 31, 2023.

https://www.fdic.gov/about/financial-reports/reports/2023annualreport/2023-arfinal.pdf (page 149)

The following excerpts are from J.P. Morgan Sales & Trading:
What is the Federal Financing Bank (FFB)?

FFB was created by Congress in the 1970s under the supervision and direction of the Secretary of the Treasury. FFB plays a crucial role in the U.S. financial system, its primary function is to provide low-cost financing to various federal entities, including agencies like the Small Business Administration and the Department of Housing and Urban Development. The FFB obtains funds by borrowing from the Treasury through the sale of Treasury securities and, in turn, lends these funds to federal programs and initiatives at favorable interest rates. By facilitating cost-effective financing, the FFB contributes to the implementation of government policies and programs, fostering economic development, supporting housing initiatives, and aiding small businesses, among other objectives. While administratively linked to the Treasury, the FFB operates independently, ensuring efficient and targeted financial support for federal activities. Additionally, the FFB has the authority to purchase an obligation issued, sold or guaranteed by a Federal Agency (i.e. Ginnie Mae).

What will happen to the securities?

The SSGN Trusts were issued with December 2033 maturities (10-year terms). In this form (SSGA 10YR Trusts) it is at the FFB’s discretion as of what to do with the securities that are no longer in GNPL form. We view this a positive indicator of FFB’s intent to hold these SSGA Trusts versus the alternatives of outright sales or re-REMIC (GNR) previously discussed by the market.

What does this mean for the GNPL market?

While $12bn+ may be considered “small” relative to $114bn+ FDIC liquidation of SVB and Signature Bank securities, this GNPL portfolio is approximately ~10% of the outstanding GNPL universe ($133bn+ as of YE23). In June 2023, the FDIC removed Blackrock Advisors as the selling agent for the GNPL portfolio (as MBS and CMO sales were ongoing) which we interpreted as acknowledgement of the likely adverse impact the sales would have incurred on the GNPL market. However, the FDIC did not provide further clarity on their intentions in the proceeding months and investors were left to speculate on when and how the dispositions of the assets would occur. This uncertainty led to further apprehension and traditional GNPL investors moved to the sidelines and the sector languished as DUS, Freddie K, MBS and CMOs markets normalized/tightened into year end.

We believe today’s announcement that these securities have been transferred onto the FFB’s balance sheet should remove the apprehension of the impending supply shock and allow the GNPL market to begin to recover. The first order effect should be that lower coupon GNPL securities (2020-2022 vintage) tighten given their newfound scarcity value, but overtime, investors that were on the sidelines for new issue/current coupon GNPL and investing in alternatives (mainly GNMA CMOs) will begin to reallocate to the sector.

From the Desk

Agency CMBS — The market remains favorable to borrowers, as spreads tightened again last week. Agency paper is generally benefitting from the “everything rally” sentiment that currently saturates all U.S. markets. In particular, low supply of Fannie Mae and Ginnie Mae mortgage-backed securities (MBS) continues to provide momentum for tighter spreads. In Fannie Mae, five-year, seven-year, and 10-year tenors were tighter week-over-week (WoW), with full-term interest-only (IO) and discount bonds (created when borrowers buy down the rate) garnered the most aggressive bids. Ginnie Mae spreads also compressed WoW, but less so on perms than construction loans. Construction loan spreads remain near historic lows in relation to Ginnie perms, as investors look to secure their REMIC pipelines in this period of low volume.

Municipals — AAA tax-exempt yields were higher across the yield curve, WoW. The short-end of the tax-exempt yield curve remains attractive for borrowers compared to taxable rates: The two-year, five-year, and 10-year tax-exempt-to-taxable ratios are under 60% (historically these ratios are 80%-plus). Municipal bond funds saw inflows of $295 million last week, with high-yield funds enjoying $279 million (almost 95%) of the new contributions. That development marks three straight weeks of inflows into municipal bond funds overall, and ten straight weeks of inflows into the high-yield fund subset. We continue to see strong demand from investors due to healthy fund inflows and reinvestment of P&I payments from existing investments. Spreads are generally tighter YTD and new-issue deals coming to market are frequently oversubscribed.

Economic Calendar for the Week Ahead

IndicatorReleasePeriodConsensusPrior
Building Permits MoM3/19/2024Feb2.0%-0.3%
Housing Starts MoM3/19/2024Feb7.4%-14.8%
FOMC Rate Decision3/20/2024@ 2pm ETNo changeNo change
Weekly Jobless Claims3/21/202416-Mar215k209k
S&P Global US Manufacturing PMI3/21/2024Mar51.852.2
S&P Global US Services PMI3/21/2024Mar52.052.3
Leading Index3/21/2024Feb-0.2%-0.4%
Source: Bloomberg

Summary of Global Fixed-Income Markets

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