Sector Update

December 4, 2017

Small yield increases occurred for most of the bond market last week. In most cases, the very long and short maturities moved by the smallest amounts, while maturities from three through seven years moved up by 4bp to 6bp. The much watched two-year/ten-year Treasury spread did reflect a continuation of the flattening trend, albeit only by 2bp. If measured by the very short end, inside the one-year point, the curve actually steepened a basis point or two.

The tax-free municipal sector moved in relative isolation to other bond market sectors last week, with yields pushing higher by over 10bp for some maturities. While increased perceived likelihood of tax reform explains some of the move, heavy supply doubtless contributed to price pressures as the current and pending calendar offer plenty of supply. Outside of municipals, relative value remained mostly consistent among bond market sectors with no noteworthy yield spread shifts for investment-grade products.

While sporadic, overall activity levels improved last week, as portfolio managers reacted to favorable market levels versus recent months and also made portfolio adjustments either to realign better with objectives or in preparation for year-end. Sales of underperforming investments based on book yields picked up with reinvestment in, often but not always, longer durations within the same sector.

Friday’s five-year Treasury closing yield of 2.11% exceeded the daily closing average year-to-date and for the last year of trading by 23bp. The ten-year Treasury finished Friday at 2.36%, 4bp above the year-to-date average and 3bp 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.  Demand for shorter duration MBS waned during the past couple of months as the yield curve has flattened, which caused 15-year MBS and ARMs to underperform 30-year MBS.

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Agency Market Update

For the second consecutive week, Agency yields rose, moving in lock-step with the increase in Treasury yields.  Ongoing strength in US economic data and raised prospects for tax reform resulted in higher US Treasury yields over the week. 

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Fixed Rate Mortgage Market Update

Treasury yields moved higher last week and mortgage yield spreads were slightly wider versus Treasuries, but remain historically tight. Mortgage rates rose and mortgage applications fell from a 7.7% drop in refinance activity, which has fallen ten of the last twelve weeks to historically low levels.

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Municipal Market Update

Municipal bond funds reported investors put cash into funds for a fourth week, as weekly reporting funds experienced inflows of $100.434MM in the latest reporting week, after experiencing inflows of $659.237MM the week prior. The four-week moving average was positive at $410.109MM, after being in the green at $221.250MM the week prior.

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SBA Market Update

Activity increased last week with investors adding near-par SBA floating-rate pools to their portfolios.  In addition, some investors added fixed-rate exposure by picking up DCPCs from recent auctions.  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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