The Fed gets its last hurrah for 2017. Banks look liquid. Ginnie Mae looks weak. Contributions from JPM, MS and Milepost.
Markets: Lots of reasons this week for short rates to rise
The Fed should hike this week, and it has a 50% chance of using its dots to signal four hikes in 2018 instead of three. Also look for the Constitution Avenue crew to announce a drop in it’s portfolio by as much as $20 billion a month starting in January, up from $10 billion currently. The US debt ceiling, which Treasury hit last Friday, may also nudge up short rates. Treasury can use $286 billion in extraordinary measures to fund the government through March. But it also will need to issue a steady supply of bills. The curve should almost fully flatten by the end of next year. See JPMorgan, US Fixed Income Markets Weekly: Treasuries, 8 Dec 2017. (JPM, Milepost).
Markets/banking: Banks stockpile liquid assets
The biggest US banks hold more than enough liquid assets to meet current bank liquidity rules, according to recent filings, which should help them weather Fed tightening. The eight largest hold $2.37 trillion in high quality liquid assets or 124% of the amount needed to cover the cash expected to leave the bank in regulators’ stress scenario. Nearly 85% of the liquidity portfolio sits in reserves held at the Fed, US Treasury debt or Ginnie Mae MBS. Another 15% is held in Fannie Mae or Freddie Mac MBS and less than 1% in other assets. As the Fed let’s its portfolio run off and starts to draw down reserves, the banks seem to have a sizable cushion for meeting liquidity rules. See JPMorgan, US Fixed Income Markets Weekly: Agency MBS, 8 Dec 2017. (JPM, Milepost).
Markets: Ginnie Mae disappoints
MBS investors hoping that Ginnie Mae would solve its recent prepayment problems were disappointed last week, and prices on the most sensitive Ginnie MBS dropped 8/32s to 16/32s below Fannie Mae. The agency announced new measures to dampen speeds in new pools, but the measures looked light. Speeds in new Ginnie Mae pools have been rising quickly in recent years, and the agency in December 2016 stopped originators from pooling loans that went through a streamline refinance within their first six months. That only delayed the prepayments. Last week Ginnie Mae extended that rule to cashout refis starting April 1. The agency also will add prepayment performance to a scorecard it calculates for each issuer, but there’s no clear enforcement mechanism for poor scores. It will also limit the pooling of loans with rates well above average. Much of the problem seems to be coming from VA loans, but Ginnie Mae has left it to the VA to apply a tangible benefit or fee recoupment test to refinanced loans, and VA has provided no public guidance. See Morgan Stanley, Agency MBS Weekly, 8 Dec 2017. See also JPMorgan, US Fixed Income Markets Weekly: Agency MBS, 8 Dec 2017. (JPM, MS, Milepost).
Markets: Eight things you need to know to trade fixed income in 2018
If you missed last week’s summary of key themes in the Street’s annual 2018 outlook gaze into the future, see our post for Mon, 4 Dec 2017. It’s there, hundreds of pages reduced to a few bullets. Brought to you by Milepost.