Sector Update

December 17, 2018

Housekeeping Note: This will be the final “Sector Updates” for 2018. We will resume normal publication on January 7th, 2019. Please feel free to reach out if there is anything we can do in the interim. We appreciate your readership and wish you a safe and happy Holiday season.

In a week where the Dow and S&P were both off over 1% and the Nasdaq close in tow at -0.84%, Treasury yields managed an increase on the week. This is probably the result of a rosier outlook on trade negotiations with China coupled with firmer core inflation and strong retail report readings. The bulk of the increases occurred in maturities 4 years and longer and the yield curve steepened 3bps on the 2s-10s to 15bps.

Last week, investment grade spreads were largely unchanged in almost every sector we track except for Municipal bonds. Municipals tightened, largely on low supply at year end, and investors continue to replace bonds they have maturing/called/pre-refunded in January. It shouldn’t be lost though, the trend over the past year has most certainly been towards wider spreads.

So far this morning, stocks continue their retreat and bonds yields are falling across the curve. Wednesday’s Fed meeting is the big ticket item weighing on the market this week. From this morning’s Market Today, “Over a one month period, investors went from pricing in two hikes in 2019 to just a 50% chance of one hike.  If the Fed’s infamous dot plot does not reflect a slower pace than previously projected, investors would be surprised.” I would expect yields to increase if the Fed doesn’t deliver sufficiently doveish comments.

What We’re Reading

WSJ: Small Banks Brace for Deposit Wars as Interest Rates Rise

WSJ: Investors Turn Focus to Fed’s 2019 Rate Path

Vining Sparks: Market Today

Adjustable Rate Mortgage Market Update

Yield spreads on hybrid ARMs were 2 to 8 basis points wider on the week, as the yield curve shifted higher, with the 5-year and 10-year Treasury increasing 4 and 5 basis points, respectively.  Both new issue and seasoned ARMs have widened over the course of the Fall as a result of wider mortgage spreads and lower tail values.

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Agency Market Update

Treasuries sold off and the yield curve steepened slightly, two occurrences not seen in nearly a month on a week-over-week basis.  Treasury Notes with terms of 2 through 5 years are trading at approximately equal levels, and as of this writing, 3-year Notes are trading at 1 basis point lower than 2- and 5-year Notes.  Last week agency bullets tightened slightly versus Treasuries.

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Fixed Rate Mortgage Market Update

Despite the considerable volatility in risk assets, yield spreads on current production coupons compared to Treasuries were relatively stable during the past week.  The new trading range is still being mapped out, but the 2018 basis widening for MBS combined with higher Treasury yields has presented investors with more attractive valuations compared to levels seen in recent years. 

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Municipal Market Update

Monday saw prices on municipals start the week steady across the curve. Tuesday through Thursday saw prices mixed daily. On Tuesday bonds in the front-end were steady, while bonds maturing 10 years and longer weakened. On Wednesday bonds ten years and in were steady, while bonds on the long-end weakened. Thursday’s price action was a repeat of Wednesday’s. On Friday prices were steady across the curve.

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SBA Market Update

Investors remain active in floating-rate SBA pools as yields on these pools should move higher if the Fed raises rates as expected this week, which should continue to drive demand in floating-rate SBAs.  Prepayment speeds for SBA 7(a) pools declined in December compared to the previous month and printed slower speeds than their respective 12-month moving averages.

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CMO Market Update

As the year comes to a close, I wanted to quickly share a couple charts showing spread and yield history from a high level over the past year. On a spread basis, short CMOs are near their tights for the year while 5yr and 10yr remain relatively wide, setting the 10yr PAC aside. On a yield basis, all are trading back from their yearly highs as the Treasury curve has also backed off yearly highs.

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