Market Musings

​​

Momentum Shift Heading Into the 4th Quarter (9/3/24)

CRT returns this year have been accumulating at a brisk pace across the capital structure (see below for a YTD visual) but, as we near Q4, momentum has shifted. The yield curve continued its odd bullish bent in August as T-Bill rates moved 5 to 35 bps progressively lower, further inverting the Bill curve. If the Fed follows through on rate cuts, currently substantial CRT coupons would start to get chipped away at. Meanwhile, Treasury coupon yields effectively moved in mirror opposite with 2-year yields rallying 38 bps, leading coupon Treasury yields lower for the month, while the rest of the coupon curve dipped 26 to 15 bps, still leaving the 5-year as the low point at 3.71%, and the 2s/10s spread now flat at 3.91%. If further belly/long end of the curve rallying would occur, even more upside potential would continue to shift from credit to convexity in broader fixed rates, perhaps dampening CRT spreads & total return accumulation. (Read more here)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

More Curve Shape-Shifting. Twilight For Floaters? (8/1/24)

With the Fed ever-increasingly expected to make a rate cut in the near future, the Treasury curve continues to shape-shift, moving back towards start-of-the-year levels. The coupon part of the curve has rallied significantly as the belly leads the way down and the current-low-point 5-year yield approaches 3.80%. Meanwhile, the front end is still holding on at the high part of the curve, pending a Fed move. At this juncture, things may be at a plateau for this year’s floater advantage as carry could be chipped away with rate cuts. (Read more here)

​

​

​

​

​

​

​

​

​

​

​

​

 

2024 At the Half: Not Quite 2023, But Still on a Brisk Pace as Carry Was Truly King in H1 (7/1/24)

At the halfway point in 2024, amidst the longest daylight hours of the year, the benchmark GSE CRT sector finished H1 solidly, gaining 6.65% YTD versus the modestly negative YTD returns seen in rates/IG and the ~2%-3%+ for HY so far this year. Though not quite at the record numbers from 2023, this year’s CRT performance, based on the CRTx® Aggregate Index, show sector mid-year total returns coming in at one of the fastest paces on record...returns can be mostly attributed to coupon carry at 69% of total return. (Read more here)

​

​

​

​

​

​

 

 

 

 

 

New Inductee Into The CRT “Hall-of-Fame” Credit Curve As Spreads Bull-Flatten (6/3/24)

Although benchmark Treasury yields have moved 60+ bps higher so far this year, credit spreads across the fixed income market have firmed moderately as risk-on demand has taken up new supply at attractively higher coupons. GSE CRT has followed the tightening move, enough so that the sector’s “hall-of-fame” new issue credit spread curve (the tightest historical composite M1/M2/B1/B2 new-issue pricing spread prints) has bull-flattened, with new inductees this year at the B2 spot, and now most recently in May at the B1 position. (Read more here)

​

Surfing A Shape-Shifting Curve (5/1/24)

The belly/long end of the curve backed up a virtually parallel 45-50bps in April, while the front end didn’t really move much at all. The curve is still inverted however, and fixed rate sectors were in the red for the month (and further in the red YTD) despite all the spread tightening in IG/HY. As the Fed keeps its stance at likely “higher for longer”, CRT and other floater coupons continue to benefit not only from higher coupon carry, but also from an intrinsic up-rate defensive convexity advantage over medium/long duration fixed rates. (Read more here)

​

With Credit Contained for Now, Look for Convexity Edge (4/1/24)

Deal-to-deal credit risk differentiation has perhaps moderated a bit across the complex, making good old-fashioned convexity a more discerning relative value factor than it has been recently, especially given the vast majority of the sector is trading at a premium right now. (Read more here)

​

“Bond Gravity” Limits Price Upside, But Carry Remains in Orbit (3/1/24)

At this point in the cycle, benchmark GSE CRT has likely limited price upside as “bond gravity”, including premium amortization effects and historic spread ranges, provide an increasing drag on how high market values may go from here, but carry remains substantial. (Read more here)​​​​​​​​​​​​​