Home in the Range
In a week with light data the market’s focus is even greater between the outlook on reopening versus the surge in virus cases and all that that could mean in slowing an expected economic rebound. On Monday, the mood was hopeful but it turned sour yesterday as once again spiking case counts, and increasing ICU admissions, put a damper on the risk-on trade. That push and pull of sentiment is likely to continue through July, and as the return to school looms closer (at least in the South), what that will look like will also impact sentiment. If schools are forced to continue with home-learning it’s bound to slow economic output. On the other hand, school officials in hard-hit states like Florida are continuing to lobby for reopening schools for the start of the 2020-21 academic year, but teachers are expressing reservations over such plans. In any event, the remainder of July is likely to be a bumpy ride with the range trade in Treasuries remaining in effect. Finally, we’d be remiss if we didn’t mention we’ve dropped another podcast, (as they say in the business). In this episode, we sit down with Jeremy Lucas, Director of Balance Sheet Strategies at CenterState Bank and Todd Wacker, VP and Senior Relationship Manager, FHLB-Atlanta to discuss funding strategies and fighting NIM compression. Listen on iTunes and Spotify.
While we said this week is very light on economic releases we did get the May Job Openings and Labor Turnover Survey and it found job openings increased more than expected as state economies sputtered to life. The number of available positions rose to 5.4 million during the month from 5 million in April. The consensus Bloomberg forecast called for 4.5 million openings. The increase in job openings was concentrated in accommodation and food services, retail, and construction and that mirrors the findings in the May and June employment reports with those sectors driving the bulk of job gains. Layoffs and quits fell by 5.83 million in May. The rate dropped to 1.4% of total employed and separated from 5.9% in April and closer to the pre-pandemic rate of 1.2%.
Despite the jump in job openings, finding work remains challenging for the unemployed. There were nearly 4 jobless workers competing for every opening in May. That current labor market slack contrasts with a two-year trend where job openings exceeded the number of unemployed. On net, employers are adding to payrolls, as evidenced by two straight record employment increases in May and June, yet with many industries seeing only gradually building demand many workers continue to be left out. With reopenings happening scattershot across the country, most of the increase in May job listings unsurprisingly were in the South, which posted a 200,000 gain from April. Openings increased 126,000 in the West and 60,000 in the Midwest. They were unchanged in the Northeast.
Mortgage Prepays Continue Faster Than Expected
Thoughts that the CARES Act forbearance provisions could lead to slower prepays as distressed borrowers take advantage of up to a year of payment deferrals has so far not materialized. The June prepayment numbers were released yesterday and once again they proved faster than market expectations. It’s now obvious any slowdown from payment deferrals is being overridden by the ongoing low interest rate environment. With the summer moving season upon us, despite the pandemic, expect strong prepays to continue in July, especially with so much of the mortgage universe in refinance-able territory. Below are three tables showing prepayments by coupon in both FNMA 30yr and 15yr. Overall, while lower coupons are experiencing the fastest percentage increases in prepayments the 3s, 3.5s, 4s, and 4.5s are paying the fastest in both the 30yr and 15yr universe. The 15yr pools, however, continue to be slower versus 30yr as there are fewer refi options for those borrowers. It’s interesting to note too that the highest coupons, while seeing higher prepays in June, are much slower than the middle coupons. That’s a sign of burnout in those coupons.
Looking at the final chart on vintage-year prepayments for 30yr pools, the speeds are strong across most coupons and origination year, but the 2014 and younger vintages display very fast prepayments, speaking to the fact much of the mortgage universe is currently refinance-able. So, trying to find slower speeds in a particular year and/or coupon may prove elusive, except for years 2013 and older, but as luck would have it the payups for those years are heavy. Perhaps a better strategy is to find specified pools, such as low loan balance, which may prove better at limiting prepays rather than focusing on coupon and/or vintage year.
Agency Indications — FNMA / FHLMC Callable Rates
|Maturity (yrs)||2 Year||3 Year||4 Year||5 Year||10 Year||15 Year|