April 20, 2020 - Market Update

The Fed purchased $14.5B of MBS on Friday: $3B of FN 15yr (2.5s/3s), $7.5B of FN 30yr (2.5s/3.5s), and $4B of GN2 30yr (2.5s, 3.5s, 4.5s).  This wraps up another week of the Fed’s agency MBS purchase operations, totaling $68B.  The Fed’s mortgage purchases fell to $15B/day last week from $30B/day the week prior.  This week, as announced Friday afternoon, the Fed will be updating its bond buying schedule again by reducing mortgage purchases to $10B/day.  Treasury purchases will also be modified to $15B/day from $30B/day last week. 

It didn’t take long for mortgage prices to slide as well as UMBS 30yr 2.5s through 4s were down roughly 1-4.5 ticks.  With 3.375% as the prevailing rate, the primary/secondary spread came in slightly lower to ~157bps vs 160bps on Thursday.  Total fixed rate origination was at $7.1B vs Thursday’s $7.8B, bringing the 5-day average down to $7.3B. 

On the commodity front, crude continues to drag downward as Covid-19 adversely impacts demand.  West Texas Intermediate (WTI) May futures contract dropped more than 28% to a two-decade low of  $13.06 (lowest dating back to 2000).  Despite producers cutting overall production in an attempt to stabilize price, the demand destruction is showing no mercy.  The surplus of oil supply is so out of whack that some have even raised the possibility of producers paying customers to take it off their hands. 

GDP data out of China Thursday evening/Friday morning came in worse than expected.  China’s economy contracted for the first time on record (-6.8%) as the coronavirus continues to wane on the world’s second largest economy.  The People’s Bank of China has already loosened monetary policy by cutting a number of key rates (to help combat the economic meltdown) but not at the same magnitude as seen in the financial crisis.  Additionally, they lowered the 1-year and 5-year benchmark lending rates by 20bps and 10bps respectively last night.

On 11/10/19, three drivers in an innocent-looking 2015 Mercedes Benz E63 AMG loaded with electronics sped from NYC to Redondo Beach, CA, the Cannonball run, in a record 27 hours and 25 minutes. But on 4/4/20 three drivers in an Audi A8 L took advantage of epically reduced traffic due to Covid-19 sheltering-in-place and did it in 26 hours and 38 minutes averaging 106 mph!