Sector Update

August 21, 2017

While the solar eclipse occurs later today across a swath of the U.S., a total eclipse already occurred in one place last week. Such tiny weekly net yield changes occurred last week that the ending Treasury curve from Friday and the curve from the end of the week prior occupy the same space on the page, with the darker colored August 11th curve eclipsing August 18th to the point of invisibility. No maturities’ yields moved more than 2bp on the week, leaving little to comment on in terms of yield curve changes other than the continuation of an over three month long trend of low and declining rate volatility. The 10yr Treasury yield did push a bit higher Monday through Wednesday and crested at 2.28%, then eased back down Thursday and Friday to finish at 2.19%, covering a modest sized trading range of 12bp for the week.


Yields in most other bond market sectors covered trading ranges slightly smaller than Treasuries last week. This is probably due to the small flight-to-quality component of the push to higher Treasury prices balanced against some risk-on sentiment midweek. Even within last week’s relatively narrow trading ranges a negative relationship between credit spreads and equity markets could be found, as corporate spreads moved tighter midweek before widening back to where they started. Mortgage spreads versus Treasuries stayed mostly intact for the week, and so did municipal spreads.


Portfolio managers started out very slowly last week, with a low volume of trades on Monday. By midweek things got pretty busy though, with a combination of redeployment of recently heavy redemptions, extension swaps, and a few intersector swaps all contributing to the flow of activity. The overall pace seemed in line with recent weeks, perhaps slightly busier.


On Friday, the five-year Treasury closed at 1.76%, 11bp below the daily closing average year-to-date and 4bp above the average for the last year of trading. The ten-year Treasury landed at 2.20%, 14p below the year-to-date average for the daily closing yield and on top of the average daily close for the last year.

Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries tightened approximately 5 bps on the week, as the recent increase in supply was absorbed. Spreads have retraced nearly half of the second quarter widening after lagging the move tighter in the fixed-rate MBS sector experienced over the past two months.

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Agency Market Update

After declining two weeks ago, Agency yields were relatively stable and experienced a modest improvement last week. Two-year Agency yields increased 1bp to 1.38%, 5-year Agency yields climbed 2 bps to 1.85%, and yields on 10-year Agencies were higher by 1 bp to 2.55%.

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Fixed Rate Mortgage Market Update

Trading activity across the MBS and CMO sectors improved last week as the mortgage market, similar to the overall bond market, continues to trade in a tight range with minimal changes in yield spreads even as the Fed discusses the potential unwinding of QE. Mortgage yield spreads and mortgage rates were essentially unchanged last week.

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Municipal Market Update

Municipal bond funds posted inflows for a fourth straight week, as weekly reporting funds experienced $586.766MM of inflows in the latest reporting week, after experiencing inflows of $631.216MM the week prior. The four-week moving average was positive at $421.205MM, after being in the green at $349.152MM the week prior.

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SBA Market Update

Last week activity was limited to floating-rate and fixed-rate SBAs trading in the secondary. Investors picked up seasoned floating-rate paper, as new issue premium paper continues to be limited.

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