Sector Update

December 11, 2017

While relatively small yield movements occurred last week, bond market sentiment continued to reflect an upward directional yield bias. A 2bp increase in five-year Treasury yields early last week pushed them to their highest level for 2017, 2.14%, and while they faded a bit mid-week, yields moved up again Friday to close at that level. And even though no yields across the Treasury curve increased more than 4bp, the direction of rates and small reduction in curve slope indicated by a 2bp contraction of the 2yr/10yr yield differential constituted advancement of ongoing trends. Furthermore, the small size of the weekly yield movements reflected consistency with the gradual nature of those trends.

Relative value changes also displayed consistency with ongoing trends last week. Municipal markets aside, investment grade bond market sectors moved in nearly uniform fashion with a barely discernible level of under-performance by the Treasury sector, leading to spreads versus Treasury benchmarks holding steady or, in a few cases, tightening a basis point or two. Meanwhile, the consistent theme for municipal markets remained their inconsistency, and a few basis points tightening of yield spreads versus Treasuries last week offset a small portion of the significant widening occurring in the weeks prior. Heavy issuance volumes and uncertainty about tax reform met head on with strong investor demand and the currently strong cravings for any kind of relative value in investment-grade products.

In one respect, last week broke from ongoing trends, as portfolio managers busied themselves to the point that activity levels greatly exceeded recent norms. All sectors participated, although activity did move around between sectors with not all products enjoying heightened activity at the same moments. Much of the activity seemed to be driven by portfolio adjustments as opposed to simple redeployment of cash, and this probably explains the way volumes rotated between sectors at times.

Friday’s five-year Treasury closing yield of 2.14% exceeded the daily closing average year-to-date and for the last year of trading by 25bp. The ten-year Treasury finished Friday at 2.38%, 6bp above the year-to-date average and 4bp above the average for the last year.


Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries remained stable for the week.  In fact, spreads have traded sideways for the past month, despite the 10-15 bps selloff in short-term Treasuries.  This has left ARMs less expensive on a relative basis, especially compared to longer duration MBS.

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Agency Market Update

Agency yields increased across the curve in response to better-than-expected jobs numbers and with the expectation the Fed will raise rates this week.  On the week, two-year Agency yields increased 2 bps to 1.85%, 5-year Agency yields improved 3 bps to 2.21%, and yields on 10-year Agencies were higher by 2 bps to 2.72%.

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Fixed Rate Mortgage Market Update

Treasury yields moved a couple of basis points higher across the curve last week, and mortgage yield spreads were tighter versus Treasuries and remain historically tight. Mortgage rates fell and mortgage applications rose 4.7% on the back of a 9.0% jump in refinancing activity.

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Municipal Market Update

Municipal bond funds reported investors pulled cash out of funds last week, as weekly reporting funds experienced outflows of $807.203MM in the latest reporting week, after experiencing inflows of $100.434MM the week prior. The four-week moving average was positive at $92.547MM, after being in the green at $410.109MM the week prior.

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SBA Market Update

Activity in the SBA sector focused squarely on fixed-rate products with the December DCPC auction being met with strong demand.  Bank portfolio managers looking for floating-rate exposure have looked to the interest rate swap market to create a “do-it-yourself” SBA floater that offers comparable yields and limited premium risk. 

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