Market Musings

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Thankful Thoughts (12/2/24)

With one month to go in 2024, the GSE CRT market is on the verge of turning in a 2nd straight 10%+ return year in a row. As Thanksgiving Day kicks off the holiday season, there are a few thankful thoughts that come to mind for the sector and its well-above average total return year: no recession, a cautious Fed, tender premiums, record tight B1/B2 new issue pricing spreads... (Read more here)

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Coasting Into Year End on a Compressed Curve (11/1/24)

At October month-end, the Treasury curve reached a curious condition. The highest par-curve yield point was the 1-month at 4.76%, while the lowest was the 3-year at 4.12%, making for a 64 bp range between high and low points on the curve, with all maturities carrying a 4%-handle yield. This is the most compressed the Treasury par curve has been since 2020, right before the Fed’s pandemic cuts started, and with the whole curve at 1%-handle yields back then…Heading into year-end, it looks like CRT may be just clipping slightly smaller, but for now still sizable, coupons... (Read more here)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Playing With a Lead to Start the 4th Quarter (10/1/24)

After much anticipation, the Fed has finally done it, cutting Fed funds by 50 bps in September, the first move since their last hike in in July of 2023. With this, CRT 30-day average SOFR floater coupons will begrudgingly, but inevitably, follow as October resets are already -6.9 bps lower and the full 50 bps Fed drop will be consolidated into lower November resets (the lag effect from a 30-day lookback). So CRT’s big play option of 2024, the sector’s relatively large coupons amidst an inverted curve, will face a dovish defensive front from the Fed heading into Q4.  However, benchmark GSE CRT is still playing with a lead over other fixed income sectors with an 8.82% YTD sector return, though the gap is now certainly slimmer on Q3’s strong curve rally buoying rates and IG/HY, which have now returned in the ~4%-8% area YTD. (Read more here)

 

Momentum Shift Heading Into the 4th Quarter (9/3/24)

CRT returns this year have been accumulating at a brisk pace across the capital structure (see below for a YTD visual) but, as we near Q4, momentum has shifted. The yield curve continued its odd bullish bent in August as T-Bill rates moved 5 to 35 bps progressively lower, further inverting the Bill curve. If the Fed follows through on rate cuts, currently substantial CRT coupons would start to get chipped away at. Meanwhile, Treasury coupon yields effectively moved in mirror opposite with 2-year yields rallying 38 bps, leading coupon Treasury yields lower for the month, while the rest of the coupon curve dipped 26 to 15 bps, still leaving the 5-year as the low point at 3.71%, and the 2s/10s spread now flat at 3.91%. If further belly/long end of the curve rallying would occur, even more upside potential would continue to shift from credit to convexity in broader fixed rates, perhaps dampening CRT spreads & total return accumulation. (Read more here)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

More Curve Shape-Shifting. Twilight For Floaters? (8/1/24)

With the Fed ever-increasingly expected to make a rate cut in the near future, the Treasury curve continues to shape-shift, moving back towards start-of-the-year levels. The coupon part of the curve has rallied significantly as the belly leads the way down and the current-low-point 5-year yield approaches 3.80%. Meanwhile, the front end is still holding on at the high part of the curve, pending a Fed move. At this juncture, things may be at a plateau for this year’s floater advantage as carry could be chipped away with rate cuts. (Read more here)

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