Sector Update

August 14, 2017

Bond yields descended across almost all bond market terms and sectors last week. While modest, the declines seemed to display the first market conviction in three weeks. Treasury yields for terms from two years to thirty years all declined more than 5bp, though no term declined more than 9bp for the week. Korea-related angst and the related selloff in equities added to an already bullish sentiment for bonds resulting from a weakfish lean in recent economic data.

Most other bond market sectors under-performed Treasuries by very small amounts last week resulting in unchanged to 3bp widening. Municipal debt yields lagged by greater amounts, with spreads in that sector widening by as much as 7bp for intermediate and long maturities.

Portfolio managers’ reactions last week varied greatly. Some viewed market action as confirmation the trading range remains intact, as they continued to replace redemptions and cash flows in order to maintain status quo, or at least to stay within targeted portfolio ranges. Others continued to adhere to the same wait-and-see attitude prevalent for the last couple of months, with the same pronounced uncertainties in place regarding the timing, nature, and likelihood of expected market influences, such as tax reform, regulatory reform, stimulus, and Fed portfolio liquidation. This posture costs money in terms of foregone yields and interest income, encouraging a growing number of portfolio managers to return to the sound practices of abiding by appropriate duration and other investment targets. These adjustments resulted in some of the recent pickup in activity.

On Friday, the five-year Treasury closed at 1.76%, 10bp below the daily closing average year-to-date and 7bp above the average for the last year of trading. The ten-year Treasury landed at 2.21%, 13p below the year-to-date average for the daily closing yield and 2bp above the average daily close for the last year.


Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries widened 1 to 2 bps on the week, as the broader bond market moved higher in price because of geopolitical concerns. Hybrid ARMs have cheapened significantly from the beginning of the year.

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Agency Market Update

Agency yields declined across the curve last week, moving in lock-step with the fall in Treasury yields. A flight-to-safety attitude remains with investors considering geopolitical risks related to North Korea.

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Fixed Rate Mortgage Market Update

Mortgage yield spreads widened a couple of basis points last week as Treasuries rallied on increased geopolitical concerns. Mortgage rates moved lower again last week, while mortgage application activity increased for purchase and refinance applications.

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Municipal Market Update

Municipal bond funds posted inflows for a fourth straight week, as weekly reporting funds experienced $631.216MM of inflows in the latest reporting week, after experiencing inflows of $143.847MM the week prior. The four-week moving average remained positive at $349.152MM, after being in the green at $148.209MM the week prior.

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SBA Market Update

Last week was very active with portfolio managers picking up semi-seasoned floating-rate SBAs and fixed-rate paper from the August DCPC auction. Investors focused on seasoned paper, as new issue premium paper continues to be limited.

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