November 3, 21 Financial Highlights Federal Reserve Balance Sheet 1 European Debt Bond Spreads 2 CDS Spreads 2 Securitization Markets CMBS Yields and Issuance 3 ABX and CMBX 4 Mortgage Rates 5 Broad Financial Market Indicators Treasury Yields 6 LIBOR to OIS Spread 6 Fed Funds Futures 7 TIPS Breakeven Inflation Rates 7
Federal Reserve 2,5 Agency Debt & MBS Federal Reserve Assets (Uses of Funds) $ billions The balance sheet contracted $9.9 billion for the week ended October 2. 2, 1,5 Lending to Nonbank Credit Markets Short-Term lending to Financials Other Treasuries 1, 5 Dec-27 Apr-28 Aug-28 Dec-28 Apr-29 Aug-29 Dec-29 Apr-21 Aug-21 Through Oct 27, 21 Source: Federal Reserve Board Treasuries continued to replace MBS on the balance sheet, growing by $5.7 billion. Agency debt and MBS together declined $15.7 billion. On the liabilities side of the balance sheet, bank reserve balances grew by $15.5 billion. The decrease was more than offset by a $25 billion decrease in Treasury deposits with Federal Reserve banks. 2,5 2, 1,5 Treasury SFA Other Banks Reserve Balances Currency in Circulation Federal Reserve Liabilities (Sources of Funds) $ billions 1, 5 Dec-27 Apr-28 Aug-28 Dec-28 Apr-29 Aug-29 Dec-29 Apr-21 Aug-21 SFA = Supplementary Financing Account Through Oct 27, 21 Source: Federal Reserve Board Assets: Lending to nonbanks TALF, CPFF, AMLF, and MMIFF; Short-term lending to financials discount window, TAF, currency swaps, PDCF, and repos; Misc. Maiden Lanes I, II, and III, credit to AIG, and other Fed assets. Liabilities: Other Reverse repos, Treasury cash holdings, and deposits with Federal Reserve Banks other than reserve balances and excluding the Supplementary Financing Program. Financial Highlights November 3, 21 1
European Debt Some peripheral European bond spreads (over German bonds) continue to be elevated, particularly those of Greece, Ireland, and Portugal. Since the September FOMC meeting, the 1-year Greece-to-German bond spread has narrowed by 45 basis points (bps), from 8.62% to 8.17%, through November 2, though the spread has risen by 11 bps in the past two weeks. Similarly, with other European peripherals spreads, Portugal s is essentially unchanged over the intermeeting period but is 56 bps higher than two weeks prior, and Ireland s spread is actually 7 bps higher since the last FOMC meeting and 1 bps higher since October 19. Similarly, CDS spreads have widened recently after several weeks of stabilization. Financial Highlights November 3, 21 2
Securitization Markets Commercial MBS Issuance by Type Billions $45 ReRemic Conduit Other Issuance of commercial MBS remains very low; however, there was a large conduit deal in October and several in the pipeline for November. $4 $35 $3 $25 $2 $15 $1 $5 $ Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Source: Bloomberg 28 29 21 Top rated three-to-five-year CMBS yield spreads over fiveyear Treasuries have been stable since June. Yield spreads on seven-to-1-year CMBS over 1-year Treasuries have declined in recent months. Basis Points 1,8 1,6 1,4 1,2 AAA-rated CMBS Yield Spreads to Treasury 7-1 yr CMBS over 1 yr Treas TALF expanded to include CMBS 1st New CMBS Issuance 1, 8 6 4 3-5 yr CMBS over 5 yr Treas 2 Mar-7 Jul-7 Nov-7 Mar-8 Jul-8 Nov-8 Mar-9 Jul-9 Nov-9 Mar-1 Jul-1 Nov-1 Sources: Merrill Lynch/Bloomberg Through Nov 2 Financial Highlights November 3, 21 3
Securitization Markets ABX.HE Indices, AAA rated by Vintage price, points of 1% The ABX continues to rise across all vintages, indicating a decline in the cost to insure against default on the underlying home equity loans. 1 8 6 4 26-1 2 26-2 27-1 27-2 Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Source: Markit Group Limited/Haver Analytics Through Nov 2 The same is true for the index value of commercial MBS credit default swaps. All vintages of the CMBX.NA.AAA continue to rise, indicating a lower cost to insure against default of commercial MBS. 1 9 8 7 CMBX.NA.AAA Indices Composite Price, points of 1% 6 5 4 3 2 1 Coupon 1, Created April 27 Coupon 7, Created April 27 Coupon 8, Created April 27 Coupon 35, Created Oct 27 Coupon 175, Created May 28 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Source: Markit Group Limited/Haver Analytics Through Nov 2 Financial Highlights November 3, 21 4
Mortgage Rates The 3 and 15-year fixed mortgage rates edged up slightly for the second consecutive week; both are up from the record lows set for the week ended October 15. Source: Federal Home Loan Mortgage Corporation/Haver Analytics The 3-year fixed rate averaged 4.23%, up slightly from 4.21% a week ago. At this time last year the 3-year fixed rate averaged 5.3%. The 15-year fixed rate averaged 3.66%, up slightly from 3.64% a week ago. At this time last year the 15-year fixed rate mortgage averaged 4.46%. Mortgage purchase applications increased last week, and the purchase index rose 1.4% from the week earlier. The refinance index decreased 6.4% from the previous week, marking the third straight weekly decline. The purchase index and refinance index are measures of loan application volume reported in the MBA s Weekly Application Survey. The survey has been conducted weekly since 199 and covers more than 5 percent of all U.S. retail residential mortgage applications. Source: Mortgage Bankers Association/Haver Analytics The refinance share of mortgage activity decreased slightly to 81.3% from 82.3% the previous week. Financial Highlights November 3, 21 5
Broad Financial Market Indicators The two-to-3 year part of the yield curve has steepened further since the September FOMC meeting, with the twoyear hitting an all-time series low. Thirty-year Treasury bonds have risen 22 bps to 4.1% since the September FOMC meeting, while the 1-year notes are up only 5 bps to 2.66%, and the 2-year declined 9 bps to.34%, an all-time low going back to 1976. LIBOR to OIS spreads are relatively unchanged since the September FOMC meeting, as all tenors have changed less than 2 basis points in either direction. Financial Highlights November 3, 21 6
Broad Financial Market Indicators The curve of expected rates from the fed funds futures market has moved even lower in the intermeeting period. Breakeven inflation rates have risen about a third of a percentage point since the last FOMC meeting. Source: Bloomberg The fed funds futures markets currently does not expect a rate increase in 211. As of November 3, the futures market for fed funds indicates an implied rate of about 21 bps for the October 211 contract, nearly 5 bps lower than what was expected around the time of the June 21 FOMC meeting. Source: Bloomberg/Barclays One measure calculated by Barclays suggests investors see CPI inflation five to 1 years out as averaging about 2.83%, which is up 35 bps from the last FOMC meeting. Financial Highlights November 3, 21 7