Sector Update

April 1, 2019

Treasury yields closed out the quarter lower for the fourth straight week. Looking back, the first quarter was fairly smooth through March 1^st with the 5yr, for example, trading in about a 20bps range. In fact, on March 1^st, Treasury yields were still +/- 7bps from where they began the year. However, markets trade on expectations and if you have a moment to watch today’s Market Watch video (less than 5 minutes), recent data seems to lean towards headwinds for growth. This morning though, the ISM Manufacturing Index and Construction Spending figures were stronger than expected and 5yr and 10yr Treasury yields are up 4 and 3bps on the news, respectively.

Q2 2019 Expectations

• It is certainly possible that the recent Treasury rally is overdone and yields could bounce back some.
• Absent a trade deal with China, better global economic activity, meaningful changes in inflation expectations, and/or a Fed that somewhat changes its “doveish” tune, yields may not return to recent highs though.

Q1 2019 Spread Commentary

• During Q1 2019, spreads pushed tighter in every sector we monitor except for Agency CMOs.
• The biggest winners in Q1 were owners of long duration as Treasury yields plummeted and/or credit exposure.
• For the quarter, longer Agency Bullets tightened more than shorter maturities as their curve flattened.
• Agency Callables tightened, more so in longer maturities. They have pushed back over the past month though.
• Corporates tightened up by 20-30bps across maturities.
• BQ Municipals tightened by 30-45bps across their curve.
• CMOs bucked the trend and widened by 10-20bps. There should be some relative value in this sector.
• MBS tightened marginally by 7-10bps.

What We’re Reading

Vining Sparks:

Market Today | Weekly Recap | MBS Prepay Commentary (March) | SBA Prepay Commentary (March)

Bloomberg: The Bond Market Shuddered. Now We Find Out If That Was Justified

“The yield on benchmark 10-year notes dropped to a 15-month low of 2.34 percent on Thursday amid speculation growth is faltering enough to trigger a Federal Reserve interest-rate cut this year. But there’s been little tangible U.S. data to justify that.”

WSJ: Debt Investors at a Crossroads as Fed Pivots

“Now, a sharp drop in Treasury yields has stirred a debate among investors about whether to take heart from the Fed’s pivot to a more growth-friendly posture or be wary of the potentially troubling causes that prompted the central bank’s shift.”

Sector Updates