Last week was busy on the economic data front, and this upcoming week will be no different. Two-year and 10-year Treasury yields rose 18 BPS and 2 BPS, respectively. There’s been a ton of volatility on the short end of the curve, and the market seems to be rethinking what the Fed will do in terms of rate cuts. Are we looking at a soft landing or recession?
Earlier in the week, Job Openings data and Job Openings and Labor Turnover Survey (JOLTS) came in well below the consensus forecast, and the prior JOLTS number was revised downwards. Yields dipped 7-10 BPS on average along the curve as a result. On Friday we had Nonfarm Payrolls and Unemployment numbers released, which both came in slightly higher than expected. Rates still rose significantly following the release of these reports.
There remains a lot of uncertainty, which translates to volatility. This week we have the Federal Open Market Committee (FOMC) December meeting, Consumer Price Index (CPI) on Tuesday, Producer Price Index (PPI) on Wednesday, and Retail Sales on Thursday. The market consensus is that the Fed is expected to keep rates on hold Wednesday.
Agency bond issuance has been extremely limited with spreads very tight to Treasuries. In the commercial mortgage-backed securities (CMBS) markets, there’s been a slight pickup in demand from bank buyers. CMBS spreads tightened between 5-10 BPS and are roughly 20 BPS off their “wide.”
We expect prepayment speeds to pick up next year. With lower rates, a lot of folks with term pressure/less sensitive prepayment will be looking to lock in new deals. There’s a lot of seasoned paper out there in general, which should drive prepayment activity with all the uncertainty in the market. In the secondary CMBS markets, trading volume is down about 70% YoY.
There’s not much to note going on with Congress, and we expect it to remain relatively quiet through the end of year. The Fed has been actively reducing its balance sheet, taking out almost $1.5T since the peak.
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