Market Musings

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Floater Coupons On Fed Watch (11/30/23)

Fed tightening has certainly helped floaters since March of last year. SOFR has gotten stuck within a few-bps range following every hike, and it hasn’t moved much from the 5.30%-ish level since the last Fed Funds raise in July. With the current economic backdrop at this point in the cycle, the risk of Fed cut/hold/raise is much more biased towards cut/hold as the inflation rate has tempered, but not necessarily to the Fed’s 2% target yet. Historically, the Fed has hiked to stave off inflation, cut to counter declining growth. The latest resilient GDP numbers would likely keep the Fed holding steady, but as soon as that changes and dips appear, historically unemployment and rates follow…

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FNMA’s CAS Hits 10-Year Mark With Solid Returns (10/31/23)

October saw FNMA’s CAS 2013-C01, the first CAS deal ever issued, mature which marked the 10-year anniversary of the CAS GSE CRT program. For a decade, the CAS program, along FHLMC’s STACR, provided a new, but now-mature, mortgage credit option for bond investors. Since the 1st 2013 deal, CAS issuance has seen 57 benchmark LLTV/HLTV deals totaling ~$62B, referencing ~$2.0T in loans. Based on the CAS sub-index of the CRTx® Aggregate Index, if you invested in CAS benchmark bonds starting in 2013, and rolled your returns forward, your total return would be ~83% per dollar invested (incl. tenders), or a 6.24% simple annualized rate, outpacing rates and IG/HY over the same period as higher yields have taken their toll.

 

 

 

 

 

 

 

 

 

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Belly/Long End of The Curve Moves Higher, Flatter (09/29/23)

Volatility in the belly/long end of the yield curve certainly picked up in September, with the 10-year hitting month-end/Q3-end at 4.59%, the highest level since 2007. Meanwhile, the short end was little changed, and the curve is still inverted as T-Bill yields hover in the 5.50% area, seemingly waiting for the next Fed move. With 2-10yr Treasury yields up +20-50bps in September, major rates and corporate sectors suffered a -1% to -2%+ total return hit, but short durations/floaters buffered the localized sell-off much better. At this juncture in the Fed tightening cycle, CRT convexity and credit characteristics have combined into a relatively lower vol/higher carry risk/reward bundle.

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