Halloween is upon us and we mark time until the Tuesday elections and wonder what else 2020 will throw at us? It has been a year of many more tricks than treats so we wait to see what the year will throw at us next. Speaking of the recent risk-off move, some point to the odds of a Dem Blue Wave, but we think it’s more tied to increasing virus cases both here and abroad and the increasing rates of hospitalization. With winter still ahead it’s not hard to envision another spike in virus cases on top of the increasing trend which will only create more headwinds for the economy. We tend to subscribe to that scenario. Meanwhile, we did get September personal income and spending numbers this morning and while they were part of third quarter GDP it’s interesting to note the momentum as we head into the fourth quarter. Personal income was up 0.9% on the month, beating the 0.4% expectation as employment gains overcame fading stimulus. Personal spending rose 1.4% for the month also beating the 1.0% expectation and 1.0% rate in August. The savings rate, while still historically high at 14.3%, is off the 33.6% rate in April and mid-18% rates of the summer as consumers become more willing to spend. So in all, a more upbeat report than expected and one that shows consumers resilient as we head into the fourth quarter. Finally, core PCE YoY (the Fed’s preferred inflation gauge) was 1.5% versus 1.7% expected and 1.4% in August. Inflation remains a non-factor to this point.
Third quarter GDP was supposed to break records and it did with a 33.1% annualized pace that topped expectations of 32.0%. The gain was powered by consumer consumption which rose an annualized 40.7% for the quarter as reopenings, job gains and the CARES Act stimulus measures all helped to fuel a powerful rebound. One concern is that most of the growth was early in the quarter, and with no Stimulus 2.0 on the horizon and rising virus case counts, the fourth quarter will likely be much more of a challenge. Also, some knee-jerk thinking is that the 33.1% gain recovers the –31.4% dip in the second quarter, but math can be a cruel temptress. To keep numbers simple, assume GDP was 100 in the first quarter and dipped -31.4% in the second cutting GDP to 68.6. Bouncing 33.1% in the third quarter only gets GDP back to 91.3, nearly 9% off pre-pandemic levels. It’s shown more clearly in the graph of total dollar GDP. For the full year Bloomberg consensus has GDP down –4.0%. This is why most economists and the Fed believe more fiscal stimulus is needed, but none seems to be coming anytime soon.
Trying to Navigate the Rough Seas of Heavy MBS Prepayments
One of the ongoing themes in MBS investment this year has been how to minimize and survive the heavy prepayments generated by most MBS in this year of ultra-low rates. One method that we’ve seen be particularly effective is the use of specified pools. These are pools with loans that carry lower balances, and thus are generally less sensitive to refinancing and the resulting prepayments. One such pool is shown here with analysis of its possible performance given the prepayment speeds of all other pools carrying similar collateral compared to what Bloomberg’s BAM Prepayment model predicts.
This is a new 30yr 2% MBS with loans no larger than $150,000 making up the pool. Bloomberg estimates the yield to be 1.40% at a projected 10.3 CPR in a rates unchanged scenario. Look further down in the analysis and you see that when you compare all other pools in the universe with similar collateral the speeds have been much slower: 1mo CPR 2.2 with a yield of 1.67%, 3mo CPR 2.4 yields 1.66%, 6mo CPR 1.6 yields 1.69%. So comparing similar collateral and those actual speeds leads to higher yields than the Bloomberg projection. This particular pool was bought in our own portfolio so if you would like to look into it further please contact your CenterState Capital Markets representative.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.09%||Unch||1 Mo LIBOR||0.15%||Unch||FF Target Rate||0.00%-0.25%||3 Year||0.273%|
|6 Month||0.09%||-0.01%||3 Mo LIBOR||0.21%||Unch||Prime Rate||3.25%||5 Year||0.426%|
|2 Year||0.15%||-0.01%||6 Mo LIBOR||0.24%||-0.01%||IOER||0.10%||10 Year||0.842%|
|10 Year||0.82%||-0.04%||12 Mo LIBOR||0.33%||Unch||SOFR||0.07%|