Market Musings

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Playing With a Lead to Start the 4th Quarter (10/1/24)

After much anticipation, the Fed has finally done it, cutting Fed funds by 50 bps in September, the first move since their last hike in in July of 2023. With this, CRT 30-day average SOFR floater coupons will begrudgingly, but inevitably, follow as October resets are already -6.9 bps lower and the full 50 bps Fed drop will be consolidated into lower November resets (the lag effect from a 30-day lookback). So CRT’s big play option of 2024, the sector’s relatively large coupons amidst an inverted curve, will face a dovish defensive front from the Fed heading into Q4.  However, benchmark GSE CRT is still playing with a lead over other fixed income sectors with an 8.82% YTD sector return, though the gap is now certainly slimmer on Q3’s strong curve rally buoying rates and IG/HY, which have now returned in the ~4%-8% area YTD. (Read more here)

 

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)

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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)

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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)

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