Sector Update

August 6, 2018

A busy schedule of economic reports failed to cause much bond market motion last week. Small net yield differences between Monday and Friday trading levels and quiet markets early this morning left barely perceptible changes across yield curves. The largest net yield change across the US Treasury curve, a 4bp decline, occurred at the three year point.

With such small yield changes, little in the way of relative value shifts between investment grade sectors occurred last week. Yield spreads between Treasuries and other sectors changed very little or not at all for the most part, with what changes that did occur tending to leave spreads tighter in most cases. The overall positive and stable tone to the numerous economic reports and low market volatility might have pushed yield spreads tighter in a noticeable fashion were they not already so tight in many cases.

The acceleration of portfolio manager activity from the week prior continued into last week, with the pace of inquiries and trade executions elevated above the average for the last couple of admittedly slow months. The most notable change in activity might be the emphasis on portfolio adjustments as opposed to outright purchases. Themes included extension swaps, shifts toward or away from over or under allocated sectors, and quite a few tax motivated trades, especially sales of very short maturity municipal debt by banks.

Friday’s five-year Treasury closing yield of 2.81% exceeded the daily closing average so far this year by 15bp and exceeded by 41bp the average for the last year. The ten-year Treasury finished at 2.95% Friday, 11bp lower than the year-to-date average and 32bp above the average for the last year.

Adjustable Rate Mortgage Market Update

On the buy side, short reset (6-months or so) conventional ARM Pools with 5/2/5 caps and 3.25% to 3.50% WACs traded. With premiums of just under 3%, expect a bit of chop for the next few months as summer seasonal prepayments wrap up and it approaches reset, then a spike at/just after the reset, and a gradual slowing thereafter.

Agency Market Update

Treasuries in the belly of the curve rallied last week as maturities of 2-, 3-, and 5-year Notes declined by 3 basis points apiece. Agency bullet yields moved in line with Treasuries and remain near the highs for the year. Three-year bullets are trading at 2.80%, five-year bullets at 2.90%, and ten-year bullets at 3.31%.

Fixed Rate Mortgage Market Update

During the past week, yield spreads on current production MBS tightened slightly to both Treasuries and Swaps. Interest rates remained in a relatively narrow range and volatility was subdued, despite a Fed meeting and payroll release. 15-year MBS yield spreads to Treasuries were tighter by 1 to 2 bps, while 30-year MBS spreads moved tighter to Treasuries by 2 to 3 bps.

Municipal Market Update

Prices on municipals were mixed on Monday and Tuesday. On Monday the front-end was steady, while bonds maturing 10 years and longer weakened. On Tuesday bonds maturing in the front-end weakened, while bonds maturing 10 years and longer were steady. On Wednesday prices weakened across the curve.

SBA Market Update

SBA activity is expected to be focused on the DCPC auction Thursday, which includes a 20yr term. 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.

CMO Market Update

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.