Sector Update

December 10, 2018

Last week, Treasury debt with maturities of 2-years and longer continued their rally from the previous week. Yields declined 7-15bps for terms of 2 years and longer, and the spread between 2-year and 10-year Notes finished the week approximately 7 basis points flatter at 13 basis points.  The belly of the curve is particularly flat. Of note, the spread between 2-year and 5-year Notes inverted for the first time in over a decade and finished the week at a spread of -2 basis points. Much of these curve changes can be attributed to increasing uncertainty surrounding policy decisions of the Federal Reserve in 2019 and whether or not an acceptable trade agreement can be reached with China. The Dow Jones, S&P 500, and NASDAQ were all down over 4.50% on the week.

For the week, investment grade spreads widened in Agency bullets and callables, Corporates, and MBS. CMOs were relatively unchanged and Municipal debt saw spreads tighten in on the week. Most names in the corporate sector widened and, over the past month, corporate debt for maturities of 2 to 10 years are 13 to 16 basis points cheaper. ARM spreads remain at or near yearly highs.

Portfolio managers, especially depositories, were busy last week. Internally, we saw an increase in swap activity compared to outright purchases. Year-end loss swaps are ramping up with only 2 full weeks left to trade in the year. Of note, we saw an increase in lower coupon Agencies out for bid with likely reinvestment in the same sector as yield and spread levels are attractive.

Adjustable Rate Mortgage Market Update

The ARM origination cycle continued last week, with 267.2mm in new issue ARM selling primarily from Fannie Mae and Ginnie Mae.  Supply was focused in Fannie Mae 5/1s (53.4mm), Ginnie Mae 5/1s (48.7mm), and Fannie Mae 7/1s (92.2mm).  The remaining 19% of weekly issuance was split between 10/1s (47.8mm) and 3/1s (2mm).

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Agency Market Update

Sovereign debt continued to rally last week, particularly further out the curve, and the intermediate portion of the yield curve inverted for the first time in more than a decade.  Treasury Notes with terms of 2 and 3 years are trading at approximately equal yields and one basis point greater than 5-year Notes.  Agency bullets slightly underperformed Treasuries last week.

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Fixed Rate Mortgage Market Update

The risk-off sentiment expanded across most markets last week and mortgages were no exception to the selling. Yield spreads on current production coupons underperformed Treasuries by 1 to 2 ticks.  However, this was a fairly modest move given the strong bond market rally and selling observed in other fixed-income sectors.

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Municipal Market Update

Monday saw prices on municipals start the week steady across the curve. On Tuesday prices strengthened across the curve. On Wednesday the markets were closed as part of the National Day of Mourning for the passing of President George H.W. Bush. On Thursday prices strengthened across the curve. On Friday prices were mixed, as the front-end was steady, while bonds maturing 10 years and longer weakened.

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SBA Market Update

SBA activity was focused on the DCPC auction last week, which included 20yr and 25yr terms.  Investors were also active last week in floating-rate SBA pools as yields on these pools should move higher if the Fed raises rates as expected next week, which should continue to drive demand in floating-rate SBAs.

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CMO Market Update

With the Treasury curve so flat, I thought it would be interesting if we took a look this week at relatively short (Highlights 1-4) and one intermediate (Highlight 5) term CMOs. It’s certainly important to note that, even though the reference curve is flat, it is still possible to enhance yields by selectively choosing “add-on” risks.

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