Top of the Street: A steeper curve, the mark of money reform, and more on MBS and CMBS

Central banks have started to talk about steepening the yield curve, and money market reform has left its mark on $1 trillion. Contributions from Barclays, DB, the Fed, GS, JPM.

Markets: Getting ahead of a steeper curve
The world’s central banks are trying to steepen global yield curves, according to Deutsche Bank, to help stabilize banks and pension funds and reign in the hunt for yield. And policymakers are starting to talk about it. Fed Chair Yellen on Friday mused about rebooting growth by “temporarily running a ‘high-pressure economy’ with robust aggregate demand and a tight labor market,” fuel for a steeper curve. Boston Fed President Rosengren on Friday noted that the Fed could change its mix of Treasury reinvestment “to steepen the yield curve.” His remarks echoed what some analysts view as the Bank of Japan’s effort to steepen its domestic curve. It was enough for Deutsche Bank to lift its expectation for year-end US 10-year yields to 2.00%, well above the 1.25% the bank expected after Brexit. Of course, the 19 bp jump in 10-year yields since the end of September and the steepening in the yield curve may have had influence, too. And don’t forget the jump in market pricing of a December Fed hike from 52% in early October to 67% on Friday. When circumstances change, so do opinions. See Yellen's remarks here. See Rosengren's remarks here. See Deutsche’s US Fixed Income Weekly, 14 Oct 2016. See Goldman Sach’s US Economics Analyst: Whites of the Eyes, 14 Oct 2016. (DB, GS, Milepost).

Markets: Money market reform leaves a mark
More than $1 trillion has left prime institutional money market funds in the last year and landed primarily in Treasury and agency debt, according to JP Morgan, raising the cost of short-term funds for banks, corporations and municipalities. The money fled ahead of reforms that took effect on Friday allowing prime funds to report floating NAVs and impose fees and gates in a crisis. Prime funds had been big buyers of short bank, corporate and municipal paper. Yields on that paper should remain elevated since prime funds have lost so much buying power and have to get used to managing floating NAVs.  Separately managed accounts and short bond funds may become the next marginal buyers. See JPMorgan’s US Fixed Income Markets Weekly, 14 Oct 2016. (JPM, Milepost).

Markets: Munis feel the impact of reform, too
The muni market has felt the impact of money market reform, too, with money funds fleeing longer muni debt to invest shorter. Spreads on all muni debt have widened, including the SIFMA index, which used to trade at a spread to 1-week repo rates but recently has traded closer to 3-month LIBOR. Investors have noticed. Dealer inventory of variable rate demand notes, which float off of SIFMA, has dropped from nearly $10 billion a few weeks ago to less than $3 billion lately. See Barclay’s Municipal Weekly, 14 Oct 2016. (Barclays, Milepost).

Markets: A policy risk reminder for investors in Ginnie Mae MBS
If you happened to forget that government policy can change the risk in Ginnie Mae and other MBS, thank JPMorgan for a reminder.  The improving capital position of the Federal Housing Administration’s insurance fund, falling FHA delinquencies, declining losses on foreclosed properties and the political appeal of a cut probably outweigh interest in building up more capital – enough to withstand a 2008 event. “We suspect that a cut will come at some point,” the bank writes, “but that its size will be limited by the need to cover expected (credit) losses. It’s even possible that there will be multiple small cuts over the next few years, balancing the desire to reduce (insurance) premiums with the need to build capital.” See JPMorgan’s US Fixed Income Markets Weekly, 14 Oct 2016. (JPM, Milepost). 

Markets: What CMBS thinks about the Internet
The CMBS market must adore Internet retailers because it sure doesn’t like prospects for the mall crowd. CMBX 6, an index credit default swap with lots of exposure to retail, is showing big differences in the spreads where underlying cash bonds trade. In January, the widest deal priced 50 bp above the tightest. This month, however, the widest priced 170 bp above the tightest. Prospects for traditional retail properties have driven some of the widening. But Goldman Sachs writes that “investors are increasingly doubtful about the true amount of appreciation for CMBS quality collateral.” See Goldman Sach’s The Mortgage Trader, 14 Oct 2016. (GS, Milepost).