June 26, 2020 - Market Update

Stocks opened lower amid concerns of new restrictions on reopening the economy as the U.S. saw another single day record in daily Coronavirus confirmations.  The total number of cases has exceeded 2.4 million, primarily in the southern and western states.  Governors have halted some business reopening plans in Texas, North Carolina, Louisiana, and Kansas while governors in the northeast such as New York, New Jersey, and Connecticut are proceeding with reopening efforts and are imposing a 14-day quarantine for visitors from higher risk sates.  Investors also digested the Fed’s stress test of banks in which the Fed said many banks could face difficulty in a prolonged Coronavirus crisis.  On Thursday the Fed announced that it would restrict banks from stock buybacks and limit dividends to investors to preserve capital.

Intermediate and long Treasury prices rose in early trading, as equity markets opened sharply lower on renewed pandemic concerns. The yield on the 10-year U.S. treasury edged down to 0.664% from 0674% on Thursday. The University of Michigan’s final sentiment index dropped from the preliminary reading of 78.9 to 78.1 on Friday. The gauge of current conditions dropped from 87.8 to 87.1 though still up from 82.3 in May, and the expectations index is 72.3 compared to 65.9 in May, the lowest since 2013. As improvement from May shows signs of gradual optimism of a recovering economy, the sentiment gauge is well below pre-pandemic levels confirming lingering consumer anxiety. The report also showed lower increases in sentiment in the south and west regions of the country where coronavirus cases have been increasing opposed to the northeast, where the spread has been limited, sentiment confidence jumped by the most on record.

Yesterday’s 10yr yield lows during the domestic session were right around the .66% pivot point/floor.  Yields began the morning up around .67 and rallied modestly heading into 9am before bouncing right around .66% again. They’ve moved microscopically higher which, in and of itself, wouldn’t mean much. But it’s notable in this case because stocks moved lower at the open (after weakening all morning) — something that would normally pave the way for additional bond market gains.

That may be a slightly cautionary tale for near-term momentum in the bond market, but the constant caveat is that it depends on the incoming COVID-19 data (and the economic data to a lesser extent).  Also, we can probably assume that there’s a certain amount of weakness in the stock market that could prompt more strength in bonds.

MBS, for their part, are doing just find with 2.0 coupons up an eighth of a point and trading at the highs of the day.  Stocks are off nearly 1% on the day now.  10 year yields are dancing right around that 0.66% level.

MBS put in a strong performance on Thursday with a fairly pronounced down-in-coupon bias.  30 year Fannie 2s through 3s outperformed the 10-year note by 3-4 ticks, although fuller coupons closed within a tick of their hedge ratios.  Ginnie 2.5s and 3s outperformed 10s by 4 ticks, although 3.5s and higher lagged the 10-year by a tick.  Lower-coupon 15-year Fannies outperformed the 5-year by 2-4 ticks, led by Dwarf 2s.  Trading volumes were solid, with a total of $282 billion in activity including $20.7 billion in specified pools.

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