Sector Update

January 22, 2019

Last week we saw yields rise by 7-10 bps across the treasury curve. The bulk of the increase really began Thursday as the U.S. was debating “ratcheting back tariffs” to “calm markets and give Beijing an incentive to make deeper concessions” and continued Friday on news China offered to boost imports by a Trillion dollars over a six year period. So far this morning, stocks are off by about a percent and Treasury yields have given back about half their yield increase from last week as murky economic data filters in and is somewhat compounded by the continued government shutdown.

Save limited exceptions, spreads came in in last week with Corporates and Munis seeing the most tightening. Of note, while Agency callables mostly tightened, 3 and 5yr maturity Agencies with 1 year of call protection managed to widen by 2 and 6bps respectively. CMOs and MBS all held relatively firm again on the week. From a longer term perspective, spreads remain wider almost without exception, when measured on a year-over-year basis.

What We’re Reading

WSJ: Small Businesses’ $2 Billion Problem: Government Shutdown Leaves Loans in Limbo

WSJ: Demand for Riskier Municipal Bonds Rises

Vining Sparks: Market Today

Vining Sparks: Weekly Recap

Adjustable Rate Mortgage Market Update

Yield spreads on hybrid ARMs to Treasuries tightened approximately 1 to 2 basis points as the broader bond market experienced a sell-off.  For the week, the 10-year Treasury increased 9 bps from 2.70% to 2.79%, the highest yield since December 26th.

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Agency Market Update

Last week the Treasury market sold off notably for maturities 2 years and out, and the yield curve steepened somewhat.  Some of the selloff has been offset with this morning’s bond market rally as yields are up 3 to 4 basis points across the curve today.  The yield curve remains inverted from 1 to 7 years.

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Fixed Rate Mortgage Market Update

A risk-on environment sent yields higher for the second consecutive week, as Treasury yields increased 7 to 10 basis points across the curve.   The resulting lower dollar prices provided a catalyst for MBS activity as investors took advantage of the highest yields available this year.

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Municipal Market Update

Investors in municipal bond funds put cash into funds for a second week, as weekly reporting funds experienced inflows of $945.911MM, after experiencing inflows of $1.554B the week prior. The four-week moving average was a positive $707.936MM, after being a positive $535.216MM the week prior.

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SBA Market Update

Investor activity was focused on seasoned and new issue fixed-rate SBA pools last week.  Fixed-rate DCPC pools remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.

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CMO Market Update

We continue to see good activity centered in the 5yr space. While this tends to be a “sweet spot”, duration and cashflow wise, for many of our investors, it also looks relatively good on a spread basis.

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