Last Week:
The market remained relatively calm until Friday when a sharp sell-off occurred. S&P Global PMI data revealed an unexpected contraction in the service sector, coming in at 49.7, compared to the previous reading of ~53. Consumer sentiment also softened, missing expectations. Despite strong earnings for 2024, Walmart issued cautious guidance for 2025, contributing to the broader negative sentiment. This led to a significant equities sell-off, prompting a flight to quality and driving rates lower across the curve. Notably, the 2-year and 10-year swap rates closed at 4.04%, down by 7 bps and 5 bps, respectively.
This Week:
The market faces a busy week, with $183 billion in Treasury auctions scheduled from Monday to Wednesday. Key economic data will be released on Friday with the PCE inflation report, the Fed’s preferred inflation gauge. Market consensus anticipates a slight uptick in Core PCE to 0.3% from 0.2% previously. Amid ongoing uncertainty, the yield curve remains flat, signaling limited directional clarity in the market.
Borrower Strategy:
- Short-term hedging is favored over long-term strategies due to prevailing market ambiguity.
- Agency debt markets remain tight, with limited supply and strong investor demand.
- Freddie Mac currently offers better pricing than Fannie Mae, while bank lending remains active.
- Borrowers with 2016-vintage Freddie Mac deals are generally opting to hold and cash flow until maturity, despite early exit opportunities.
- Many hold significant equity but show reluctance to refinance early. However, strong financing conditions suggest that early exits could offer opportunities for cash-out refinancing or capital redeployment.
