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From the Capital Markets Desk


Is this the calm before the storm? According to the Wall Street Journal, the last month of trading has seen volatility, as measured by positive and negative price movements in the S&P 500, at its lowest levels in over two decades. What is causing this sustained tranquility?

On June 23rd, Britain voted to leave the EU (have you already forgotten about “Brexit?”), setting up a classic risk-off trade: stocks down, safe-haven bonds up. After a couple weeks, the market effect of Brexit was muted. Some market observers have blamed a “summer lull,” which does happen most years, when traders break for the beach. More likely, this is our new reality- where the market expects the Fed and international central banks to continue accommodative policy and prop up markets indefinitely.

10 year treasury, the benchmark rate for GNMA project loan securities, has settled into a tight range of 1.50-1.60, with only momentary exceptions. One big driver of this rate will be the Fed’s decision on whether to raise the federal funds rate in September (and/or December). Be on the lookout for clues of any uptick in inflation that gets us closer to the Fed’s 2% target. That seems to be the last remaining hurdle for the Fed to raise rates, after a few solid months of job gains.

In our corner of the world, GNMA rates have done well the last few weeks- some 223fs are locking around 3.00% note rate! Immediately post-Brexit, traders gapped their spreads over the 10 year treasury. Now that treasury rates have settled in this context, we have seen gradual erosion of spreads, as a result of strong demand from REMIC investors. We don’t see signs of an abrupt turnaround, but at these historically low levels, why gamble with such significant downside risk?

Merchants Capital, a subsidiary of PR Mortgage & Investments, serves as the conduit between PR Mortgage customers and the real estate capital markets, by marketing GNMA securities directly to Wall Street. In 2015, Merchants Capital issued over $1.2 billion in GNMA securities, which represented 6% of the market nationally. This production and direct access to capital markets allows PR to offer industry leading rates.


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