Sector Update

August 20, 2018

Market volatility in equities and some commodities last week failed to translate to investment grade debt markets.  Minimal changes to investment grade yield curves resulted from small intraday yield changes with no consistent direction. No point on the US Treasury curve finished the week at a yield more than 2bp distant from where it started.

With the near stagnancy of Treasury yields, significant spread changes versus benchmarks and notable relative value shifts should not have occurred in the investment grade debt markets last week. They didn’t. Even the recently volatile municipal sector maintained mostly consistent spreads that held steady through some significant bursts of investor activity.  Yield spreads versus Treasuries showed a slight bias toward widening in the mortgage sector, though this was only noticeable for the longer duration products. Callable agencies tightened 1bp for some structures, surprisingly holding onto most of the prior week’s widening despite low market volatility. While corporate spreads pushed wider and tighter on an intraday basis during the week with an on and off again risk trade based in part on international trade concerns and the news feed concerning Turkey, the net effect for the week left yields and spreads in the sector almost exactly where they started.

A continuation of trends from the prior week resulted in similar types and slightly lower levels of portfolio manager activity. The daily flow of inquiries from investors redeploying cash from redemptions seemed to trail off somewhat while the pace of portfolio rearrangements held. Extension trades, many of them by banks focusing on short and lower-yielding municipal positions, constituted much of this activity.

Friday’s five-year Treasury closing yield of 2.74% exceeded the daily closing average so far this year by 7bp and exceeded by 33bp the average for the last year. The ten-year Treasury finished at 2.86 % Friday, 1bp higher than the year-to-date average and 19bp above the average for the last year.

Adjustable Rate Mortgage Market Update

Spreads were unchanged in ARMs last week despite the slight widening in their fixed-rate counterparties.  The August ARM origination cycle started and despite the cyclical increase in supply, volumes were comparably lower versus last month.  The increase was primarily driven by higher G2 5/1 issuance, which was at the expense of 3/1s.

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Agency Market Update

Geopolitical events around the globe led to increased equity and commodity market volatility over the past week but, despite the heightened volatility, Treasury yields ended the week essentially unchanged from the previous Friday.  Agency bullet yields moved in line with Treasuries.  Three- and five-year bullet yields were unchanged at 2.75% and 2.82%, respectively.

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Fixed Rate Mortgage Market Update

Yield spreads on current production MBS underperformed Treasuries and widened slightly over the past week on a risk-off sentiment driven by geopolitical concerns.  Both 15- and 30-year MBS yield spreads to Treasuries were wider by 1 to 2 bps. 

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Municipal Market Update

Prices on municipals were steady on Monday and Tuesday. On Wednesday they were mixed, as the front-end was steady, while bonds maturing 10 years and longer strengthened. On Thursday and Friday they were steady again across the curve.

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SBA Market Update

Prepayment speeds for equipment loan pools slowed and real estate pools sped up this month, each reversing their direction from July. Equipment loan pools fell below their six-month moving average and real estate pools ascended above theirs. Seasoning continues to overwhelm other pool characteristics and the path of speeds as pools season remains consistent with previous months.

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CMO Market Update

VADM (Very Accurately Defined Maturity) spreads remain relatively wide and are a great addition or alternative for investors already considering front/short cashflows with WALs between 3-5 years. VADM investors typically want to mitigate cashflow extension and a VADM structure is designed exactly for this need.

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