Sector Update

August 13, 2018

Yields declined progressively across the short and intermediate portions of the investment grade bond markets last week, continuing a gradual trend toward less upward curve slope. All Treasuries maturing one year and beyond finished the week lower; those maturing in five years or more moved lower by 7bp or more while two year maturities surrendered 4bp and the one year portion of the curve only gave up 1bp.

Treasury yield declines outpaced other investment grade sectors by very small amounts. Corporate debt yield spreads versus Treasuries edged a basis point wider on the short end of the curve, though some of the stronger names actually held steady. Longer maturities and also some of the weaker investment grade issues pushed wider by as much as 4bp. Yield spreads in the mortgage sector also widened by small amounts, 1bp to 3bp for most products. Agency debt held steady for bullet structures while callable issues widened 1bp to 3bp. Municipal debt also lagged the yield decline in Treasuries, causing the five-year through seven year portions of tax-free curves to widen by 5bp or more while the balance of the curve tracked Treasuries more closely.

Some portfolio managers busied themselves with minor portfolio restructuring last week, especially in the municipal sector.  Significant differences between individual and corporate tax rates and a steep municipal curve relative to other sectors created opportunities effectively reposition within the municipal sector, especially for banks, and also in some cases created opportunities to effectively reallocate into other sectors.

Friday’s five-year Treasury closing yield of 2.75% exceeded the daily closing average so far this year by 8bp and exceeded by 25bp the average for the last year. The ten-year Treasury finished at 2.87 % Friday, 2bp higher than the year-to-date average and 24bp above the average for the last year.

Adjustable Rate Mortgage Market Update

ARM prepayments slowed slightly for July, in line with the slowdowns occurring for most fixed rate MBS. Seasonal trends in housing turnover and fixed rate mortgage quotes holding near the upper end of their recent range limited early ARM payoffs and the trend is expected to continue with slower or stable prepayments in the coming months barring large bond market yield changes.

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Agency Market Update

Economic uncertainty in Turkey caused a flight to quality, sending Treasury yields down at the end of the week.  Agency bullet yields moved in line with Treasuries.  Three-year bullet yields declined 5 basis points to 2.75%, five-year bullet yields fell 7 basis points to 2.83%, and ten-year bullets fell by 8 basis points to 3.22%.

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Fixed Rate Mortgage Market Update

Yield spreads on current production MBS widened slightly this past week, as the sector failed to keep pace with the overall Treasury market rally on Thursday and Friday.  Both 15- and 30-year MBS yield spreads to Treasuries were wider by 2 to 3 bps. 

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Municipal Market Update

Prices on municipals were mixed on through Thursday. On Monday bonds maturing 10 years and in were steady, while the long-end strengthened. On Tuesday bonds maturing 10 years and in were again steady, while the long-end weakened. On Wednesday the front-end was steady, while bonds maturing 10 years and longer weakened.

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SBA Market Update

SBA activity last week was focused on the DCPC auction Thursday, which included 20yr and 25yr terms.  Investors have also remained active in floating rate equipment pools offered at par and premium pricing as yields on SBA floating rate pools moved higher over the last several weeks. 

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CMO Market Update

Mortgage sector Investors, whether in CMOs or MBS, continue to favor front/short cashflows with WALs between 3-5 years and extension to the 6 to 7 years if rates increase markedly.

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