Sector Update

February 11, 2019

Last week marked the third consecutive week we’ve seen Treasury yields fall and their lowest weekly close since January 12th, 2018. Yields were down 1-3bps on shorter maturities and 5-6bps on maturities 2-years and longer. We may be looking at a fourth straight week of declines unless markets see progress on trade talks with China, a path to avoiding another government shutdown, and/or better global economic news.

What We’re Reading

CNBC: Regarding another government shutdown “We’re not in a good place”

WSJ: Prepare to Pay More for Diapers, Clorox and Cat Litter

Bloomberg: Investors Are Adding Riskier Debt as Fed Pauses Rates

Vining Sparks: Market Today

Vining Sparks: Weekly Recap

Adjustable Rate Mortgage Market Update

Yield spreads on hybrid ARMs to Treasuries tightened approximately 1 to 4 basis points last week, despite most mortgage-related sectors experiencing some degree of spread widening.  Spreads have tightened recently but remain wider compared to levels at the start of December.

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Agency Market Update

The yield curve remains inverted between 1 and 7 years, with the spread between 1- and 5-year Treasuries now at -7 basis points, and Treasury yields have retreated to levels not seen since the beginning of the year.  Agency bullets mostly moved in line with Treasuries.  Bullet yields for 3- and 5-year maturities fell by approximately 3 to 6 basis points to 2.51% and 2.59%, respectively.

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Fixed Rate Mortgage Market Update

Yield spreads on current production MBS to Treasuries were mixed on the week but remain relatively stable over the past month. 15yr MBS activity was centered in current production 15-year 4.0’s. The focus for FNMA DUS has generally been longer finals (7-12 years).

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Municipal Market Update

Total issuance for the trading week is estimated to be $6.4B, which is just above last week’s trading volume of $6.1B in issuance, according to revised data from Thomson Reuters. This level of issuance should be well received by market participants due to strong demand driven in large part by high redemptions.

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SBA Market Update

The temporary disruption in SBA new issuance due to the government shutdown has resulted in light secondary inventory levels.  The impact of the shutdown was evident in the February fixed-rate DCPC auction last week as issuance was down significantly from the January auction.

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CMO Market Update

Last week, we saw good activity in VADMs with average lives ranging from 4-6 years. Generally, investors look to VADMs to help manage extension risk and cashflow volatility if rates move upwards. As of late, investors are also making sure cashflows don’t shorten up too much if rates fall from current levels.

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