April 24, 2020 - Market Update

The market didn’t react all that much to any of yesterday’s news headlines or economic/earnings data. The prevailing 30yr fixed rate has been hovering around 3.25-3.375% and started to move away from the top end of that range yesterday.  This caused the primary/secondary spread to compress into the 150-160bp range.  This is a big difference from where the spread was on March 9^th when primary rates were still in the 3.5-4% range and the implied secondary market rate for MBS plummeted (prices sank too), widening the spread out to >200bps. 

As overwhelming origination volumes have subsided from their peak, liquidity has firmed up marginally. However, conditions have yet to completely normalize as bid/ask spreads could still be multiple ticks wide and true price transparency remains a challenge. Today, the Fed will be conducting up to $10B in Fed MBS purchase operations across Conventionals and Ginnies. While this stimulus injection is designed to “promote smooth market functioning” per the Fed, the potential for market volatility could remain near-term.

Equities were almost unchanged at the close with the Dow up a mere 39 points (+.17%).  The Jobless Claims and PMI prints weren’t “good” but certainly not as bad as most feared, which ended up being viewed as a net positive on the day.  Major indices did hit a little bump intraday following a headline out of China around Remdesivir, a Gilead Science drug that’s being tested to fight covid-19.  It stated that the first clinical trial was not a success. It’s still very early in the testing process and Gilead stressed not to make any negative conclusions just yet.  As it relates to earnings, 120 of the S&P 500 companies have reported with 67% falling short on earnings per share.  The message has been consistent across most of these companies in stating that Q1 was at least inline (if not ahead) up until the final two weeks of March when business conditions began to deteriorate. 

While the economy is shrinking quickly as we are in a brief depression the data is no longer all dismal. Car sales may have stopped falling, consumer sentiment and consumer expectations of the future are no longer declining, and demand for oil and gasoline has bottomed. This suggests that we are beginning to hit bedrock.

This morning, Treasuries are flat with yields +/- 1bp across the curve.