Sector Update

April 9, 2018

Bond markets disobeyed analysts and economists last week by pivoting the wrong direction. Yields at the long end of investment-grade markets moved higher, while short-term yields edged lower. While relatively small, yield changes resulted in the Treasury curve breaking from recent trends and expectations by steepening for the first week of the business quarter, albeit by only a small amount with 4bp increases for ten-year and greater maturities and a couple of basis points of yield declines inside of a year.

Most other investment grade sectors finished the week with similar results to Treasuries, with yields for the long end of the balance of the bond market moving higher by slightly greater amounts than Treasuries of like duration. For example, mortgage-related securities with average lives of seven years finished the week with yield spreads 2-3bp wider than where they started, while shorter structures finished with spreads about where they began the week. US agencies’ debt moved with Treasuries, except for issues with call options. These issues performed much like mortgages, with the longer structures widening by a couple of basis points or more. Corporate spreads finished mostly intact, with a few names finishing the week with slightly wider spreads for longer paper. Municipal markets behaved differently from the rest, as is so often the case, this time finishing the week with yield spreads 2-3bp tighter versus Treasuries.

Portfolio managers apparently hadn’t warmed up for the new business quarter, as many were inactive last week. Admittedly, many were still on holiday, and it is also true that small bond market moves relative to equities didn’t supply much excitement. Activity seems likely to pick up this week, as many investors complete reporting tasks and turn their attention back towards markets and portfolio maintenance.

Friday’s five-year Treasury closing yield of 2.59% exceeded the daily closing average so far this year by 6bp and was 52bp higher than the average since one year ago. The ten-year Treasury finished at 2.77% Friday, 2bp higher than the year-to-date average and 37bp above the average for the last year.

Adjustable Rate Mortgage Market Update

Yield spreads between new-issue hybrid ARMs and Treasuries were stable this past week and have managed to lag the tightening experienced in fixed-rate MBS. As expected, March was one of the weaker months on record in terms of issuance, with volumes totaling just $991mm, a decline of $273mm from the previous month.

Agency Market Update

Agency yields rose, albeit modestly, moving in lock-step with the increase in Treasury yields. Back and forth risk-off flows amid a chaotic round of trade threats between the U.S. and China was responsible for much of the price action in Treasuries. On the week, two-year Agency yields were unchanged at 2.35%, 5-year Agency yields increased 3 bps to 2.70%, and yields on 10-year Agencies climbed 3 bps to 3.07%.

Fixed Rate Mortgage Market Update

MBS yield spreads versus Treasuries were mixed and CMO spreads widened as Treasury yields rose across the curve. Mortgage related securities with average lives seven years and beyond finished the week with yield spreads 2bp to 3bp wider, while shorter structures tightened a couple of basis points.

Municipal Market Update

Municipal bond funds reported investors pulled cash out of funds last week, as weekly reporting funds experienced outflows of $247.111MM, after experiencing inflows of $36.792MM the week prior. The four-week moving average was a positive $143.568MM, after being a positive $307.034MM the week prior.

SBA Market Update

While most bond market sectors languished last week and portfolio managers eased into a new business quarter, the SBA sector mustered a fair amount of business relative to prior weeks. Speculation about the number of further rate increases always seems to lead to questions about floaters, and this kind of attention resulted in some 7(a) trades.