Sector Update

February 20, 2018

Intraday bond market volatility backed off a bit last week as yields progressed slightly higher for most investment grade securities. Impressive yield increases, as much as 10bp, occurred at the two- through three-year portions of the Treasury curve, and yields for these terms increased in other sectors as well. Small yield increases for maturities seven years and beyond resulted in a flattening in line with ongoing trends from prior to the sudden surge in equity market volatility at the end of January.

While intraday yield swings returned to more normal levels last week, yields for products dependent on implied volatility as a major spread component held on, in some cases even moving to wider spreads versus the Treasury market. Agency callables in particular exhibited this tendency, and while mortgage spreads changed little last week, for the large part they held on to several basis points of widening from the week prior. Investment grade corporates also cheapened slightly versus Treasuries, especially the longer maturities. Meanwhile, municipal debt moved by similar amounts to Treasuries, though outcomes throughout the sector varied quite a bit based on terms and credits.

Portfolio managers more actively sought to redeploy cash last week, while spending less time focusing on overall portfolio metrics and adjustments. Trading exhibited lots of ebb and flow, with very quiet intervals interrupted by bouts of brisk activity.

Friday’s five-year Treasury closing yield of 2.63% exceeded the daily closing average so far this year by 20bp and was 65bp higher than the average since one year ago. The ten-year Treasury finished Friday at 2.88%, 22bp above the year-to-date average and 52bp above the average for the last year.


Adjustable Rate Mortgage Market Update

Yield spreads between new-issue hybrid ARMs and Treasuries were 1 to 2 basis points wider last week, generally lagging the widening experienced in fixed-rate MBS.  The theme in the ARMs space continues to be lower dollar prices, higher projected returns, and better performance compared to fixed-rate MBS. 

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Agency Market Update

Agency yields were higher this week and the curve flattened in response to higher than expected CPI data on Wednesday.  On the week, two-year Agency yields increased 13 bps to 2.22%, 5-year Agency yields improved 10 bps to 2.68%, and yields on 10-year Agencies were higher by 5 bps to 3.23%.

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Fixed Rate Mortgage Market Update

Mortgage related security yield spreads to Treasuries tightened and the curve flattened last week, as volatility remains elevated in the financial markets.  Mortgage rates were mixed last week but have increased almost 50bps this year.  Mortgage applications for the week ending February 9th fell 4.1%. Purchase apps were down 5.9% and the MBA Refi Index fell 1.9% to 1274.

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Municipal Market Update

Municipal bond funds reported investors pulled cash out, as weekly reporting funds experienced outflows of $443.409MM, after experiencing inflows of $674.908MM the week prior. The four-week moving average was positive at $312.146MM, after being positive at $717.654MM the week prior.

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SBA Market Update

Fixed rate SBAs and low dollar price floaters continued to comprise a large share of activity in the sector last week. Monthly prepayment speeds revealed consistency with every month since the October procedural change implemented by the SBA. SBA loan trading held pace, while diminished supply resulted in slower USDA loan activity.

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