Thanksgiving Eve is not the time when one sets out to make weighty investment decisions; thus, today’s session will probably go quietly into that good night with most everyone packing up early and either heading to their Thanksgiving destination, or planning to receive said travelers for the gastronomic holiday. The thing is with Black Friday dominating Friday’s activities—and thus devoid of any economic reports— there is a decent menu of releases today that could very well set the tone for trading next week once the holiday-travelers return in force. We’ll discuss those morsels below, but in closing we want to wish all our readers a safe and happy Thanksgiving holiday!
While the economic food-for-thought is plated below, the appetizer remains a trade deal that is more tantalizing than tasty as officials from both countries held a phone call Monday to discuss issues, and rumor has it that head way has been made. Then again, we’ve been here before right? We’ll just leave that right there for now and turn to more concrete observations below:
- Given GDP’s reliance on consumer consumption, October personal income and spending numbers are the entrée in today’s releases but they aren’t due until 10am ET. For the month, incomes are expected to have increased 0.3% matching the September print. Spending is also expected to have increased 0.3% beating September’s 0.2% gain. The Fed’s preferred inflation measure, core PCE, is forecast to increase 0.2% for the month versus 0.0% in September but year-over-year it should remain unchanged at 1.7%. Thus, if the forecasts hold the consumer should remain resilient in their spending, while core inflation remains fairly docile allowing the Fed latitude to cut in the future should these spending numbers weaken.
- Speaking of GDP, the second estimate of third quarter GDP was released this morning and beat expectations as it increased 2.1% versus the first estimate of 1.9%. While consumer consumption matched the first estimate at 2.9% it was less worse business investment that bumped the overall number up two-tenths. Meanwhile, early estimates for the fourth quarter are low with the Atlanta Fed’s GDPNow model forecasting growth of just 0.4% while the New York Fed forecast is slightly better at 0.7%. Those forecasts should get a boost, however, as the preliminary durable goods orders numbers for November posted much better than expected this morning.
- Going hand-in-glove with consumer spending is the latest read on consumer confidence. In that regard, yesterday’s print for November came in slightly below expectations at 125.5 versus 127.0 consensus and 126.1 in September. For all practical purposes, however, the November print represents a sideways drift near cycle highs. The assessment of the present situation deteriorated somewhat, although future expectations improved. In summary, the consumer seems poised to continue spending as confidence remains high.
- In a Monday night speech, Fed Chair Powell struck an upbeat tone while signaling interest rates would probably remain on hold. “At this point in the long expansion, I see the glass as much more than half full. With the right policies, we can fill it further, building on the gains so far and spreading the benefits more broadly to all Americans.” That last point is something Powell in particularly fond of noting. In a series of Fed Listening “Town Halls” Powell acknowledged that some of the harder hit communities are just now seeing the benefits of the ten-year expansion. His comments signal a belief that policies that encourage continued expansion and allow more late-comers to benefit are the right policies to follow. The implication is not to expect rate hikes anytime soon while a lower-for-longer, more dovish stance, seems the direction of the Fed in 2020.
Investment Idea- 3.5% Coupon 30yr Jumbo MBS
As we’ve moved through the various options that we like in the mortgage-backed security space, one of the best opportunities to get near 3% book yields is with the 30yr Jumbo MBS product. Jumbo references the fact that each loan in the pool is greater than the conventional lending limit which is $484,350 for single-family units in most of the U.S. Thus, GSE-insured loans made in excess of this amount are designated as Jumbo loans and offer varying traits that should be understood before venturing into this arena.
First, these loans comprise a much smaller universe than conventional loans that are smaller in amount but dominate the lending landscape; thus, pools comprised of these jumbo loans trade with wider spreads and thus greater yields than their more popular conventional siblings. Second, as a consequence of the larger loan sizes the borrowers tend to have solid credit profiles and are financially astute, meaning they will quickly refinance when a cost-saving opportunity exists. Third party originators, like Quicken Mortgage, know this too and will reach out to such borrowers even for the slightest refi advantage. Third, because of the large loan size you will find loans concentrated in high-cost states like California so there can be a lack of geographic diversity in a pool.
As a consequence of the above issues jumbo pools offer some of the better yields in the MBS space. The below pool is a new 3.5% coupon pool with 777 underlying loans with a max loan size of $1.17 million and average size of $636 thousand. At a current price of 102.234 the consensus yield is 2.96% with a duration of 4.39 years. As mentioned above, a principal risk in these pools is if rates continue to fall and prepays accelerate. Notice in the down 100 rate scenario the yield drops to 2.30% as the duration falls to 2.01 years. Similar but opposite volatility is apparent in the higher rate scenarios. If you believe market rates will remain relatively steady over the near-term, or move modestly higher, jumbo MBS can be a valuable addition to your MBS portfolio. Even if you aren’t sure on the direction of interest rates, and who really is, but you can handle the prepay risk, contact your CenterState Bank representative to view some current offerings.
Agency Indications — FNMA / FHLMC Callable Rates
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