A wave to politics, some wrestling with the dark side of strong employment and some detours into niche markets that might have promise. Contributions from JPMorgan, Barclays, Goldman, Deutsche and Wells.
Markets: Money and politics
It’s one thing to campaign, another to govern and something else entirely to run portfolios around politics. But that will not stop the Street from speculating. Expect a split government with Dems running the White House and Senate and Republicans running the House. That’s the mantra from JPMorgan this month, just as Barclay’s had it in June. Expect no real action on all the important issues: tax policy, global trade, immigration. You only need to read this stuff once. It should all be different on November 9. See JPMorgan’s US Fixed Income Markets Weekly, 05 Aug 2016, or Barclay’s All Eyes on November, 15 Jun 2016. (JPM, Barclays, Milepost).
Markets/Economics: Full employment meets falling profits
Steady gains in employment and falling corporate profits have caught the attention of economists and rates analysts, some of whom, like Goldman Sachs and Deutsche Bank, worry that corporations could respond by eventually slowing hiring or cutting back on the workforce. Rising payrolls, wage pressure and little productivity growth promise to keep pressure on profits. This could take a few directions: (i) a surprising boost to consumer income and demand-led growth, (ii) efforts by employers to protect profits by slowing hiring, or (iii) a mix. Profit pressure without productivity gains puts a cap on growth, and on rates. See Goldman’s US Views: The Role of Risk Management, 08 Aug 2016, and DB’s US Fixed Income Weekly, 06 Aug 2016. (GS, DB, Milepost).
Markets: ARMs race
The market in agency MBS backed by ARMs has always paled beside the bigger fixed-rate sector, but Wells Fargo sheds some needed sunlight on the improving credit quality, rising loan balances, major prepayment differences across servicers and differences in relative value. Among the better value: 7/1 ARMs, unless serviced by Flagstar. A comprehensive review of the sector is in Well’s Agency MBS Weekly, 05 Aug 2016. (WFC, Milepost).
Markets: A new flavor in MBS specified pools
Watch your local specified pool market. Fannie Mae has recently followed Freddie Mac’s lead and started pooling formerly defaulted mortgage loans that the agency nursed back to good health without any modification, keeping the original terms intact. Most of these loans came to life before 2008, and the resulting R or re-performing MBS pools have coupons between 5.0% and 6.0%. It turns out these pools also show prepayments similar to loans that have never defaulted. The R pools should probably price at the same level as similar regular Fannie Mae 30-year pools but with roughly a $0-16 concession for relative lack of liquidity, according to JPMorgan. See JPMorgan’s US Fixed Income Markets Weekly, 05 Aug 2016. (JPM, Milepost).
Markets: A new CMBS benchmark
The first private CMBS deal built to comply with Dodd-Frank rules for risk retention came to market last week to a warm reception. The $871 million WFCM 2016 BNK1 priced with contributions from Wells Fargo (39.4%), Bank of America (35.5%) and Morgan Stanley (25.2%). The originators retained 5% of each class, with the banks splitting up each piece in proportion to their contributions. The 9.5/10.0-year AAA super-senior class priced at 94 bp over the swap curve, 3 bp tighter than recent issues. See Goldman Sach’s The Mortgage Trader, 05 Aug 2016, and JPMorgan’s US Fixed Income Markets Weekly, 05 Aug 2016. (GS, JPM, Milepost).
Markets: Private CMBS ebbs and flows
Secondary market trading in private CMBS continues to pick up from earlier this year, according to JPMorgan, but dealer positions in CMBS continue to fall and the Top 5 market makers now control more than 80% of the volume. Pricing on 10-year AAA CMBS backed by bank loans only now price 10 bp to 15 bp tighter than deals backed by non-bank loans, possibly on the assumption that bank trading desks will continue to support their own deals in the long run. See JPMorgan’s US Fixed Income Markets Weekly, 05 Aug 2016. (JPM, Milepost).