Sector Update

August 7, 2017

Small yield changes last week left the Treasury curve slightly flatter. The three-year maturity finished where it started, and no maturity on the long end fell more than 5bp. Despite a much-anticipated payroll report, escalating tensions in Korea and abroad, and a variety of meaningful news headlines, volatility seemed to avoid last week’s bond market.

Yields in other sectors trended closely with Treasuries. A barely observable propensity toward slightly tighter yield spreads between most sectors and Treasuries provided a minimal push toward any relative value shifts. The municipal sector rescued relative value conversations with the only material spread changes, tightening by as much as 6bp for some maturities amidst an ongoing wave of heavy redemptions.

Many portfolio managers possessing a self-described wait and see attitude must be growing impatient, as the bond market provided little to see during the last few weeks. Perhaps the magic of the upcoming solar eclipse will provide a vision. If not, the recent theme of minor portfolio adjustments to capitalize on rising short-term rates and readjusting durations that shrank during the ongoing waiting and observing period will likely continue. It is well worth repeating the continuation of an ongoing theme: the timing, nature, and likelihood of expected market influences, such as tax reform, regulatory reform, stimulus, and all matters Fed, continue to challenge decision processes, leaving investors undecided as to the future path of the market. Despite these unresolved issues, market participants still need to remain on target with their goals.

Friday’s closing yield of 1.82% for the five-year Treasury was 6bp below the daily closing average year-to-date and was 12bp above the average for the last year of trading. The ten-year Treasury finished the week at 2.26%, 8p below the year-to-date average for the daily closing yield and 9bp above the average daily close for the last year.


Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries were unchanged for the week, lagging the tightening trend in the fixed-rate MBS sector. As a result, demand for ARM product was steady last week as investors took advantage of the spread pickup versus fixed-rate alternatives.

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Agency Market Update

Agency yields continued to hold steady for the short end and moved slightly lower in the 5- and 10-year maturities. On the week, two-year Agency yields increased 1 bp to 1.42%, 5-year Agency yields decreased 2 bps to 1.91%, and yields on 10-year Agencies fell by 3 bps to 2.61%.

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Fixed Rate Mortgage Market Update

Mortgage yield spreads were slightly tighter last week and activity was generally slow as the curve flattened 3bps (2s to 10s) and 10-year Treasury yields moved a couple of basis points lower after several disappointing economic reports. Mortgage rates moved lower and mortgage application activity slowed last week.

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Municipal Market Update

Municipal bond funds posted inflows for a third week, as weekly reporting funds experienced $143.847MM of inflows in the latest reporting week, after experiencing inflows of $322.992MM the week prior. The four-week moving average turned positive at $148.209MM, after being in the red at $2.329MM the week prior.

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SBA Market Update

Floating- and fixed-rate SBA markets fell between periods of active issuance last week, with secondary trading providing a surprising level of activity given the lack of issuance. Two-way activity in DCPCs and also in equipment-loan-backed SBA pools comprised most of the activity.

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