Sector Update

December 3, 2018

Treasury debt rallied on the week and continued its recent flattening trend.  Yields declined modestly for terms of 2 years and longer, and the spread between 2-year and 10-year Notes finished the week approximately 3 basis points flatter at 20 basis points.  The belly of the curve is particularly flat, and on Friday the spread between 2-year and 5-year Notes finished the day at 3 basis points.  Much of the move in market rates appeared to be in reaction to Fed chair Jay Powell’s comments on Wednesday with regard to monetary policy, followed by investors turning their focus to the meeting Saturday at the G20 summit between President Trump and Chinese President Xi Jinping regarding the current trade impasse.

Investment grade spreads were mixed compared to the previous week.  The most significant spread movement occurred in agency MBS and tax-free municipals.  Mortgage debt debt largely tightened in versus Treasuries while municipals cheapened.  Agency debentures also mostly cheapened, depending on term and structure, and bullets are trading at particularly attractive spreads.  Most names in the corporate sector widened and, over the past month, corporate debt for maturities of 2 to 10 years are 12 to 16 basis points cheaper compared to a month ago.  ARM spreads were mostly unchanged on the week but 7/1 and 10/1 spreads have widened out considerably over the past month and are now at historically cheap spreads and mostly have favorable par or discount handles.  The upcoming DCPC auction is this Thursday for investors looking for fixed SBA paper.

Investors were fairly active last week, with portfolio managers particularly active in agencies, municipals, and MBS.  Executing extension swaps in bank-qualified municipals continues to be a popular trade, particularly with portfolio managers selling 2019 and 2020 maturities and extending out on the curve.   MBS activity largely consisted of higher coupon 15-year paper as well as current coupon seasoned high LTV 30-year pools.  Purchases of CMOs mostly centered around vanilla front sequentials.  Most ARM purchases were spread between 10/1 and 7/1 structures.  See individual sector updates for additional details.

Friday’s 5-year Treasury closing yield of 2.81% was 10 basis points above the average over the past year and 6 basis points above the 2018 average.  The 10-year Treasury yield finished at 3.00% on Friday, 9 basis points above the year-to-date average and the average for the past year.

Adjustable Rate Mortgage Market Update

The ARM origination cycle continued last week, with 87.5mm in new issue ARM selling primarily from Freddie Mac.  Supply was focused in new issue 7/1s (50.2mm) with the remaining split between 5/1s (18.4mm) and 10/1s (18.3mm).  ARM gross issuance remains at multi-year lows as November issuance came under 1 billion for the second consecutive month.

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Agency Market Update

Treasuries rallied last week and continued to flatten modestly.  Agency bullets on the short end of the curve moved in line with Treasuries while bullets in the intermediate and longer end of the curve widened.  Agency bullet yields for terms of 2 to 5 years fell by 2 to 3 basis points.  Yields on 3- and 5-year bullets declined to 2.89% and 2.95%, respectively.

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Fixed Rate Mortgage Market Update

During the past trading week, yield spreads on current production coupons to Treasuries reversed their recent course and tightened 5 to 6 bps from the previous week.  The risk-on tone in the broader market this morning is continuing to cause modest downward pressure on yield spreads. However, the basis widening trend that has been solidly in place for most of 2018 has resulted in more appealing spread levels.

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Municipal Market Update

Monday saw prices on municipals start the week steady across the curve. On Tuesday prices were mixed as bonds maturing 10 years and in strengthened, while the long-end weakened. On Wednesday prices were mixed again, as bonds ten years and in strengthened, while the long-end was steady. On Thursday and Friday prices strengthened across the curve.

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SBA Market Update

The bond market closing on Wednesday should not adversely impact the fixed-rate DCPC auction scheduled later this week.  Marketing is expected to commence on Tuesday, and debenture interest rates are scheduled to be set on Thursday.  Fixed-rate DCPC pools and SBIC fixed-rate debentures remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.

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CMO Market Update

This week we will focus on the November Trade Summary where we look at what our Customers invested in last month. Fixed-rate CMOs saw the most activity as usual but we did see a small resurgence in floating-rate demand. On November 8th, the 5-year Treasury hit a fresh 2018 high of 3.09 but it was all downhill from there as it closed out November at 2.84 where it still stands today.

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