June 30, 2020 - Market Update

Stocks – Stocks opened mixed as investors assess news on coronavirus infections against the last day of the second quarter, the best since 1998. Following the first quarter, the S&P 500 saw its best 50-day surge in 90 years before flattening in June. The Federal Reserve is preparing for a possible second wave of infections as consumer optimism is threatened by rising cases that are stalling reopening initiatives and impacting economic progress. Chairman Powell is scheduled to appear before the House Financial Services Committee with Treasury Secretary Mnuchin later this afternoon. New data that China’s  manufacturing sector is showing signs of recovery was met with mixed reactions as concern looms over the government’s ability to prevent health care systems from being
overwhelmed through newly imposed restrictions

Treasury – Intermediate and long Treasury prices opened slightly lower, as the market appears to be settling in for Thursday’s employment report. The 10-Year Treasury is yielding 0.64%. U.S. consumer confidence rose in June by more than forecasted as optimism increased amid business reopening, though sentiment remained well below pre-pandemic levels. The Conferences Board’s index jumped 12.2 points to 98.1, the biggest one-moth gain since late 2011. The rise in confidence shows American are regaining optimism as more businesses reopen, especially the hard-hit states like New York, though the improvement was concentrated among higher-income individuals. New outbreaks in states on the West Coast and in the South, which have already resulted in closures of some bars and beaches, could dampen confidence moving into July.

MBS – Most MBS underperformed Treasuries on Monday, although a few key coupons managed to perform well. While 30yr Fannie 2s trailed the 10-year by 3/32s, 2.5s and 3s managed to track the Treasury or outperform it by 2 ticks. Most Ginnies trailed their 10-year hedge ratios, although GNII 3s also managed to squeeze out a small outperformance. 15-year Fannies lagged the 5-year by a tick or two, with the exception of Dwarf 2.5s which tracked its 5-year hedge ratio. Trading was relatively sluggish, with $175 billion in total activity including $12 billion in specified pools.

Lock vs Float Considerations With Rates at All-Time Lows
Stocks and bond yields are still in holding patterns relative to early June volatility. Meanwhile, mortgage rates are at all-time lows. There are scenarios where rates could improve, but the base case is quite the opposite. All of the above depends on Coronavirus.

  • The natural course of action for rates is to move higher from here, but that can be overcome by troubling enough COVID-19 news and/or a big enough sell-off in stocks.
  • Mortgage rates have less of a cushion versus Treasuries than they did in recent months.  If Treasury yields rise, mortgage rates will be less capable of defying broader bond market trends.
  • The decision to lock or float is as simple as asking yourself what you expect to happen with the course of the pandemic in the U.S.
  • The only other thing to keep in mind is lender capacity.  With the best 30yr fixed rates in the high 2’s, lenders don’t need to drop rates aggressively to entice business.  If the best rate you can offer is still in the low 3’s, you may have a float opportunity simply to allow your lender to catch up with reality.

This will be a deceptively informative week for financial markets. The biggest consideration continues to be the exponential growth of COVID cases in several states and the concern about exponential growth in other states. While CA, FL, TX, and AZ are in the spotlight, other states that have begun to ease quarantine measures are worried they’ll follow a similar path. If they do, this would be the week where that would become more apparent. The most logical result would be more “pulling back” in stock prices and bond yields.

COVID cases (and yes, the market is smart enough to account for increased testing) may be the biggest market mover, but it’s not the only one. Economic data is a natural counterpart to case counts (but the fear is that as case counts rise, econ data may change its tune from “recovering” to “relapsing”). By the end of the week, we’ll have Chicago PMI, ISM Manufacturing PMI, ADP Employment, and the big jobs report, just to name a few of the highlights.

Notably, the jobs report will hit on Thursday morning instead of the typical Friday. This is due to Friday being the observance day for Independence Day. In addition, bond markets will close 3 hours early on Thursday, making for a condensed trading window following the jobs data.

Last but not least, it’s “month-end” and also the end of the quarter for financial markets. This can bring additional seemingly random movement to both stocks and bonds as money managers are required to adjust their portfolios to match the decisions made by account-holders and the changes in the published benchmark that the fund adheres to.


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