Trading Desk Talk

Top Line

• Market volatility spikes
• Fannie Mae volumes disappoint
• Inflation reports complicate Fed’s job

Market Volatility Hits New Levels

Overall market volatility was one of last week’s most salient stories following the closures of SVB and Signature Bank. Some highlights of the week are outlined below:

• Monday Morning Sprint: Treasury markets caught a massive bid Monday with the whole curve breaching below 4%. While the 10-year Treasury dropped around 12 basis-points (bps) from Friday to Monday, the two-year note descended 61 bps – a move over nine standard deviations from the average when looking at 30 years of data.
• Fed Fund Bets Unwind: Wednesday morning headlines changed the mindset of investors to a “hike and hold” strategy with a lower terminal rate measured by 100 bps of cuts before year-end. This largely came on the back of distress in U.S. regional banks such as First Republic and PacWest as well as a large primary bank in Credit Suisse.
• ECB Hikes: The European Central Bank announced a rate hike of 50 bps, despite calls for a smaller or no hike given the volatility in markets. This move furthered the sell-off in Treasuries as investors pondered the prospect of Federal Reserve officials parroting this hawkish stance in this week’s Federal Open Market Committee (FOMC) meeting. While benchmark rates sold off, agency commercial mortgage-backed securities (CMBS) spreads exhibited considerable volatility as investors showed selective interest in certain bond structures while shunning others.

The change that can occur in a single week is incredible. Treasuries are lower across the curve and the delta between two-year and 10-year Treasuries we consistently reference is sitting at around -41 bps on Friday. This was a massive re-shaping of the yield curve which saw this same delta reach as low as -111 bps as recently as Wednesday March 8, less than two weeks ago. The MOVE Index, pictured below, is an index that looks to capture volatility in bond markets. Think of this as the bond equivalent of the VIX, where higher values translate to higher volatility. Last week this index hit its highest level since June 2009, a level of volatility that caused many investors to be sidelined. Spreads reacted to risk propagating through markets with indices for investment grade credit default swap (CDS), investment grade corporate credit, and single-family mortgage-backed security (MBS) ending the week broadly wider. Naturally, this translated to wider spreads in our own agency CMBS markets where we saw widening 10 bps to 20 bps in Fannie Mae DUS and Ginnie Mae project loans (PLs) and construction loans (CLs).

Fannie Mae volume continues to disappoint – Last week saw the release of Fannie Mae’s business volumes through February which showed just how slow market activity has been to start the year. After January’s 74% drop in comparable monthly volumes from $8.5 billion in 2022 to $2.2 billion in 2023, February showed a tamer slowdown – from $3.7 billion to $3.4 billion. Year-to-date, securitizations and issuance from Fannie through February is at $5.6 billion in 2023 versus last year’s $12.2 billion figure. While it remains unclear how Fannie will make up the differential, we are keeping our ears on the ground to discern how they will increase volumes to ultimately meet their 2023 purchase cap of $75 billion.

Inflationary picture update – Blink and you might have missed one of the most important economic releases in the run-up to this week’s FOMC meeting. Last Tuesday, Consumer Price Index (CPI) for February released in-line with economist estimates with a headline figure of 6.0%, below January’s 6.4% figure. The core reading came in at 5.5%, a touch below January’s 5.6% reading. Producer Price Index (PPI) was released on Wednesday, indicating that prices upstream from the American consumer have fallen materially. Headline PPI showed a 4.6% year-over-year increase versus expectations of 5.2% and a downward revised 5.7% January figure. The same story holds true in the core series which came in at 4.4% versus forecasts of 5.2% and a downward revised 5.0% increase from January. Thursday’s import and export prices both came in above expectations, with the former falling -0.1% month-over-month whereas the latter rose 0.2% over the same period. Import and export prices were expected to fall 0.2% and 0.3%. This data, along with employment data that shows considerable resilience in the face of a Federal Reserve tightening cycle that was put in motion over a year ago, has made Fed Chair Jerome Powell’s and other policymaker’s jobs hard. Their situation is increasingly difficult considering the market stress emanating from the closures of SVB and Signature bank, events that sparked a global risk-off move.

From the Desk

Ginnie and Fannie Mae – Volatility in our markets cannot be understated. Treasury rates swung wildly last week, reaching intraday ranges of ~30 bps multiple times. Agency CMBS spreads have dampened the effects to coupons somewhat, but the overall tone in the marketplace is risk off. Fannie Mae DUS spreads are strongest for plain vanilla structures that are passed directly on to end investors instead of dealer balance sheets. DUS spreads are still broadly 10 to 20 bps wider however. The daily tape bombs from regional bank stress has spooked much of the GNMA investor market. Spreads widened roughly 10 bps last week which marks approximately 50 bps total for the month of March. The dispersion among bids has also widened dramatically from best to worst (about 30 bps). The market is somewhat bifurcated in investors looking to add exposure vs mostly on the sideline

Municipals – AAA tax-exempt yields were lower across the curve, especially on the front-end. The yield curve continues to be less inverted, moving from 36 basis points a week ago to just under 20 basis points currently. The market saw a fifth straight week of mutual fund outflows with approximately $461 million leaving the market, however, high yield bond funds had inflows of approximately $301 million into the market. Primary new issuance volume remained light last week with the banking turmoil keeping investors on the sidelines. Expectations are for continued low issuance volume into this week with the Fed meeting in the spotlight.

The Week Ahead

The marquee event of the coming week is undoubtedly Wednesday’s FOMC meeting where the Fed is expected to raise rates 25 bps. The conclusion of this meeting will also provide an updated summary of economic projections (SEP) and lifting of the Fed’s blackout period. Tomorrow we will get a gauge of housing market activity as existing home sales are expected to have rebounded to a 5.0% month-over-month figure. Thursday we will see jobless claims data as well as new home sales and activity indices from both the Chicago and Kansas City Fed. Friday’s durable and capital goods orders as well as both manufacturing and devices purchasing managers’ indexes (PMIs) from S&P Global will round out the week.

Economic Calendar

The information contained herein, including any expression of opinion, has been obtained from, or is based upon, resources believed to be reliable, but is not guaranteed as to accuracy or completeness. This is not intended to be an offer to buy or sell or a solicitation of an offer to buy or sell securities, if any referred to herein. Lument Securities LLC may from time to time have a position in one or more of any securities mentioned herein. Lument Securities LLC or one of its affiliates may from time to time perform investment banking or other business for any company mentioned.