Sector Update

January 22, 2018

Most investment grade yields moved higher and yield curves steepened again last week, extending a trend that began in mid-December. Yields for all maturities beyond two years rose at least 5bp and yields for Treasuries maturing in five years through ten years increased 10bp to 11bp. While not large, the 8bp widening of the 2yr/10yr yield spread since the beginning of 2018 defies both the long-term trend and the most common current economic narrative.

The municipal sector outperformed the balance of the market again last week, with spreads versus Treasuries tightening across the entire term structure. With yields for much of the tax-free curve moving lower versus Treasuries by double digit amounts, the 1bp or, in a few cases, 2bp changes in relative yields for the balance of the investment grade market seem to barely deserve mention other than to describe their consistency.

While activity improved in many sectors, portfolio managers failed to show up in the expected numbers last week. Enticing yields and heavy recent redemptions notwithstanding, activity only improved slightly versus the prior week for the large part, and some of the activity that did occur involved bond switching to adjust portfolio parameters. Perhaps some combination of inclement weather for portions of the US and the MLK holiday suppressed market activity.

Friday’s five-year Treasury closing yield of 2.45% exceeded the daily closing so far this year by 12bp and was 52bp higher than the average since one year ago. The ten-year Treasury finished Friday at 2.66%, 13bp above the year-to-date average and 22bp above the average for the last year.



Adjustable Rate Mortgage Market Update

Yield spreads on new-issue hybrid ARMs to Treasuries tightened 1 to 2 basis points last week, which was the result of a modest bond market sell-off that generally sent yields higher across the curve. Flows in the secondary market for ARMs were relatively active, especially for a holiday-shortened week.

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Agency Market Update

Agency yields crept higher last week, with the 10-year hitting a level not seen since December 2016.  As shown on the chart below, yields are near or at their 12-month highs across all tenors.  For the week, two-year Agency yields increased by 6 bps to 2.09%, 5-year Agency yields improved 8 bps to 2.51%, and yields on 10-year Agencies were higher by 9 bps to 3.00%.

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Fixed Rate Mortgage Market Update

Mortgage security yields increased last week and have moved higher this year, as treasury yields and mortgage rates have pushed higher. Mortgage yield spreads versus Treasuries were mixed last week as Treasury yields moved higher across the curve and are currently in the upper end of the trading range.

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Municipal Market Update

Municipal bond funds reported investors put cash into funds for a second week, as weekly reporting funds experienced inflows of $1.18B, after experiencing inflows of $1.06B the week prior. The four-week moving average was positive at $503.830MM, after being positive at $271.840MM the week prior.

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SBA Market Update

Activity continued to be limited in the SBA market, as investors chipped away at floating-rate and fixed-rate SBAs being held in inventories.  The limited activity was centered on trading par handle floating-rate issues and the latest issue DCPC. 

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