Sector Update

April 10, 2017



The Treasury yield curve flattened last week, with yields for maturities five years and beyond declining and yields on the short end increasing. This change in shape would be more interesting if the move were larger; no point on the curve moved more than 6bps. It is quite surprising such small interest rate movements occurred during a week that featured so much news, including a US attack on Syria, release of the FOMC minutes, an approximately 100k plus miss from the payroll overestimate, and much more. Please see the Vining Sparks Weekly Recap for details.

 

Activity picked up in most bond market sectors last week. Inquiries and trades with portfolio managers increased as the week progressed. Supply continues to limit activity in some product arenas. In some it also induced some rather sporadic activity, as many portfolio managers wait patiently for securities that meet their parameters, then react when such bonds are issued or appear in the secondary market via bid lists. Despite last week’s increase in activity, the “wait and see” attitude still seemed to suppress activity as the plethora of news failed to clarify the exact nature of or timelines for changes at the government level that might significantly alter economic growth assumptions.

 

Treasuries slightly outperformed bonds in most other sectors last week. Although consistent across market sectors, the small 1bp to 3bp of yield spread widening occurring in most cases indicates ascribing a cause might be reaching. It is tempting to reach though, as the escalation of geopolitical tensions and overall negative nature of economic data last week should logically push spreads wider. As with the twisting of the Treasury curve, more time and greater motion are needed to verify a real trend or pattern.

 

The 1.92% yield at which five-year Treasuries finished trading last Friday is 2bp below the year-to-date daily closing average. It is also 43bp above the average for the last year of trading. At 2.38%, the yield for the ten-year Treasury is 5bp below the year-to-date average and 40bp above the average daily close for the last year.

 

 

 

 

 

 

 

 

 

Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries widened by 1 to 2 bps on the week. The continued widening represents the recent increase in supply (issuance trends detailed below). Higher supply should continue in the near-term based on seasonal trends.

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Agency Market Update

Agency yields were mixed on the week with modest increases on shorter-term maturities and small declines for longer-term maturities. Two-year Agency yields increased by 4 bps to 1.39%, 5-year Agency yields held firm at 2.04%, and yields on 10-year Agencies were lower by 2 bps to 2.78%.

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Fixed Rate Mortgage Market Update

Trading activity across the MBS and CMO sectors improved last week, but remained light as the mortgage market continues to trade in a tight range with minimal changes in yield spreads even as the Fed discusses the potential unwinding of QE. Yield spreads in 15yr and 30yr fixed MBS were mixed last week: slightly tighter to Treasuries and slightly wider to swaps.

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Municipal Market Update

Municipal bond funds recorded outflows for the week, as weekly reporting funds experienced $287.201MM in outflows in the latest reporting week, after experiencing inflows of $265.041MM the week prior. The four-week moving average remained positive at $8.313MM, after being a positive $61.827MM the week prior.

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SBA Market Update

Last week was a good one for the SBA sector, with a combination of product availability and strong demand. The recently issued floating-rate pools met strong demand, much as they have ever since the Fed Funds and Prime rate increases.

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