Sector Update

April 2, 2018

Investment grade yields for terms beyond two years finished last week below where they started. The progression toward a less positively curved slope continued, this time driven by progressively larger yield declines for longer durations. Yield declines of greater than 7bp occurred for US Treasuries maturing beyond seven years, while the two-year term held fast and points in between declined by greater amounts relative to their term.

Other investment grade sectors underperformed Treasuries last week for the large part. Municipal debt trailed by the greatest amount, with yields only finishing the week a couple of basis points lower, even on the long end. The mortgage sector only trailed slightly, with yield spreads versus Treasuries widening by 1bp to 3bp. Corporate and US agency debt trailed by smaller amounts, with shorter issues keeping pace and the long end only lagging by a couple of basis points.

Portfolio manager activity varied day to day last week. The pending quarter-end seemed to discourage any kind of activity that would induce changes other than to sop up excess liquidity. Some portfolio managers allowed liquidity to accumulate during recent redemptions, and the redeployment of this cash along with some late month redemptions preserved the pace of activity relative to what might not have occurred due to the quarter-end and the Easter holiday.

Friday’s five-year Treasury closing yield of 2.56% exceeded the daily closing average so far this year by 4bp and was 51bp higher than the average since one year ago. The ten-year Treasury finished at 2.74% Friday, on top of the year-to-date average and 34bp above the average for the last year.

Adjustable Rate Mortgage Market Update

Yield spreads between new-issue hybrid ARMs and Treasuries were 1 to 2 bps wider last week.  The widening can be attributed to the recent rally in bond prices and a reflection of the increased prepayment risk on newly issued bonds with higher weighted-average coupons.

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Agency Market Update

The Agency yield curve continued to flatten last week as investors digested a slew of data releases, with most of the movement occurring in longer term finals.  Two-year Agency yields moved higher by 1 bp to 2.35%, 5-year Agencies declined by 3 bps to 2.68%, and yields on 10-year Agencies decreased by 7 bps to 3.04%.

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Fixed Rate Mortgage Market Update

MBS yield spreads versus Treasuries widened as Treasury yields fell across the curve beyond two years.  The Treasury curve hits its flattest levels of the cycle between 2/5s, 2/10s, and 2/30s. Mortgage rates fell 6bps last week reversing the trend higher this year, while mortgage applications rose as both purchase and refinance applications increased. 

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Municipal Market Update

Prices on municipals in the front-end of the curve were steady for the week. On Monday bonds maturing 10 years and longer were also steady, while on Tuesday, Wednesday and Thursday bonds maturing 10 years and longer strengthened. Volume for the trading week is projected to be $7.85B, which is well above last week’s revised level of $3.4B in issuance.

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SBA Market Update

While a relatively slow trading week for SBAs occurred, the number of investors visiting the sector surpassed what would have been expected given the quarter-end and holiday combination. Floater activity mostly consisted of recently-issued equipment loan pools, augmented by some lower-dollar priced more seasoned pools.

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