Sector Update

February 26, 2018

Four days of rather volatile intraday trading left yield curves near where they started last week across the investment grade sectors of the bond market. Yields swung both ways throughout Tuesday, jumped higher on Wednesday, and then fell enough Thursday and Friday to mostly erase the Wednesday move. No point on the Treasury curve finished the week at yields more than 3bp from where it started.

The municipal sector slightly under-performed the balance of the investment grade market last week, with yield spreads versus Treasuries pushing wider by as much as 7bp for some terms and structures. Most of the municipal market moved more closely with other sectors than this though, and most other sectors moved in close concert. Other than this modest cheapening of the municipal sector, no notable relative value shift occurred in investment grade markets. The greatest significance of last week’s spread behaviors might be that yields and spreads dependent on implied volatility held on to recent gains, remaining wide relative to norms for the months leading into the late January/early February selloff and volatility surge.

Portfolio managers actively sought to deploy cash last week. This led to brisk activity late in a week that got off to a slow start after the three-day weekend. A fair amount of bond switching, including some extension trades, occurred in the municipal sector. Otherwise, activity remained mostly confined to cash purchases with minimal restructuring and bond swapping.

Friday’s five-year Treasury closing yield of 2.60% exceeded the daily closing average so far this year by 14bp and was 61bp higher than the average since one year ago. The ten-year Treasury finished Friday at 2.84%, 15bp above the year-to-date average and 47bp above the average for the last year.



Adjustable Rate Mortgage Market Update

Yield spreads between new-issue hybrid ARMs and Treasuries held firm last week. Earlier this month, Ginnie Mae announced a plan to target certain lenders with expulsion from its primary bond program over VA loan churning. 

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Agency Market Update

The curve flattened on the week with yields on Agencies moving slightly higher on the short-end of the curve, and declining for maturities 5-years and longer.  Two-year Agency yields moved higher by 5 bps to 2.27%, the 5-year Agency yield decreased 1 bp to 2.68%, and the yield on the 10-year Agency fell 5 bps to 3.17%.

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Fixed Rate Mortgage Market Update

Mortgage related security yield spreads to Treasuries widened and the curve flattened last week.  Mortgage rates moved higher again last week, continuing the trend higher over the last six months.  Mortgage applications fell for the second consecutive week.  Refinance activity fell 7.1% to 1183 and continues to be historically low and range-bound. 

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Municipal Market Update

Municipal bond funds reported investors put cash into funds, as weekly reporting funds experienced inflows of $347.403MM, after experiencing outflows of $443.409MM the week prior. The four-week moving average was positive at $203.707MM, after being positive at $312.146MM the week prior.

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SBA Market Update

As investors anticipate a continued increase in short-term rates, demand for floating-rate investments continues to be strong.  Activity in the sector centered around low to moderately priced SBA floaters last week. Monthly prepayment speeds revealed consistency with every month since the October.

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