While the bond market was closed Monday for Columbus Day, equities posted strong gains like kids without supervision.  But with the bond adults back in the house yesterday it was fixed income investors who liked yields that had been backing up for two weeks and it generated a nice bit of buying in Treasuries, particularly at the longer end.  News that trials of a J&J vaccine were halted were credited with some of the Treasury rally but with many more vaccine candidates in the testing stage at some point one or more will break through; thus, the risk-off rallies are limited with yields remaining in that well-worn range that has prevailed since March.   Finally, in this week’s podcast, we feature a conversation between Rob Nichols and our own Chris Nichols. Rob serves as the president and CEO of the American Bankers Association, which represents banks of all sizes and charters and is the voice for the nation’s $20 trillion banking industry. He is consistently ranked as one of Washington’s Top Lobbyists.  Chris has 30+ years of banking experience, is an active bank investor, small business owner, frequent speaker, co-author of The Successful Lender’s Field Guide, and frequent blogger. It’s an entertaining and informative show.  Listen on iTunes and Spotify.

newspaper icon  Economic News

September CPI was released yesterday and the numbers all came at pre-release expectations. Overall CPI rose 0.2% for the month versus 0.4% in August. Meanwhile, core CPI (ex-food and energy) was also up 0.2% versus 0.4% in August as some moderation took place after pops in July and August. On an year-over-year basis overall CPI rose 1.4% versus 1.3% in August. Core CPI rose 1.7% for the second straight month.

September CPI YoY


Also within the report year-over-year real average hourly earnings gained 3.3% representing a modest uptick from August’s downwardly revised 3.2%. That’s decent wage and earnings growth but not the 4+% rates from expansions past. The spike in used cars continued with a monthly increase of 6.7% and 10.3% on a year-over-year basis. If you’re looking to sell the old beater this may be your time! As it stands the report contained little in the way of surprises and only reaffirms that inflation won’t be forcing the Fed’s hands anytime soon.



line graph icon  Mortgage Refinance Activity Continues Implying Rapid Prepays Will Continue


It’s no surprise to anyone that owns positions in mortgage-backed securities that the number one risk this year has been excessive prepayments. Given the drop in market rates and aggressive marketing by several third party originators almost all corners of the MBS market have been hit. The graph below shows the Mortgage Bankers Association Refinance Index (white line) and the FHLMC 30-year retail mortgage rate (blue line). You can see how as that rate has plunged since 2018 the refi index has climbed.


MBA Refi Index


This morning, the weekly MBS Mortgage Applications Report was released for the week ending October 9th and there was  a dip in both purchase and refinance applications but that’s probably just a pause before more applications arrive again. The Refi application rate fell –0.3% after increasing 8.2% the prior week. Purchases fell  -1.6%. Refi applications made up 65.6% of all applications versus the prior week’s 65.4% and the highest rate since August 7.


We’ve found a few ways to protect against excessive prepayments that force your book yields lower, if not into negative territory, is to look for specified pools that carry lower loan balance mortgages that history has shown are more resistant to refinance. Also, limiting third party originators in pools and looking to states that are less prone to refinance are two more ways to slow prepays and protect your book yields. Be sure to contact your CenterState Bank sales representative and he or she can begin to comb through pools that will meet the above criteria.


bar graph iconAgency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 0.20 0.28 0.44 0.59 1.37 1.83
0.50 0.19 0.27 0.42 0.57 1.25 1.71
1.00 0.18 0.26 0.40 0.54 1.22 1.67
2.00 0.25 0.38 0.49 1.12 NA
3.00 1.04 NA
4.00 0.99 NA
5.00 0.92 NA
10.00 NA

Securities offered through the SouthState | DuncanWilliams 1) are not FDIC insured, 2) not guaranteed by any bank, and 3) may lose value including a possible loss of principal invested. SouthState | DuncanWilliams does not provide legal or tax advice. Recipients should consult with their own legal or tax professionals prior to making any decision with a legal or tax consequence. The information contained in the summary was obtained from various sources that SouthState | DuncanWilliams believes to be reliable, but we do not guarantee its accuracy or completeness. The information contained in the summary speaks only to the dates shown and is subject to change with notice. This summary is for informational purposes only and is not intended to provide a recommendation with respect to any security. In addition, this summary does not take into account the financial position or investment objectives of any specific investor. This is not an offer to sell or buy any securities product, nor should it be construed as investment advice or investment recommendations.

Published: 10/14/20 Author: Thomas R. Fitzgerald