Sector Update

January 28, 2019

Last week we saw yields decline by 3-4 bps across the treasury curve. The declines were roughly double until yields increased Friday for a couple reasons. First, a WSJ article reported the Fed was considering ending their portfolio normalization sooner than later. All else equal, this represents easier monetary policy than markets anticipated. Second, a short-term funding bill was enacted to re-open the government, at least through February 15th. The economic calendar this week is the largest we can recall and will feature many delayed releases from the shutdown. You can follow them this week (and every week) in the Market Today.

Corporate and Agency spreads continued their recent tightening trend. Munis took the week off and widened out by 3bps. CMO spreads, both PAC and Vanilla, were unchanged on the week and MBS ended the week 1-2bps wider. Over the last 4 weeks, spreads have tightened to varying degrees in Agencies, Corporates, Munis and MBS. The only sector where spreads look to have widened is in CMOs.

What We’re Reading

WSJ: Stocks Start Off 2019 With a Bang

WSJ: Popular Hedge Fund Bet on Fannie and Freddie Is Paying Off Big This Year

CNBC: Trump tells WSJ another government shutdown is ‘certainly an option’

WSJ: Fed Officials Weigh Earlier-Than-Expected End to Bond Portfolio Runoff

Vining Sparks: Market Today

Vining Sparks: Weekly Recap

Adjustable Rate Mortgage Market Update

Yield spreads between new-issue hybrid ARMs and Treasuries were unchanged last week, as the broader bond market moved up in price, sending yields slightly lower across the curve.  ARMs outperformed their fixed-rate MBS counterparts, with yield spreads widening 1 to 2 basis points on MBS for the week.

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Agency Market Update

Last week the Treasury market gave back some of the yield it had gained the week before.  The market rallied, with yields falling by 2 to 4 basis points for maturities 2 years and out.  The front end of the curve is still slightly inverted, and agency bullets resumed their recent tightening trend.

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Fixed Rate Mortgage Market Update

Yield spreads on current production MBS to Treasuries widened 1 to 2 basis points on the week, with higher coupons underperforming modestly.  Valuations remain relatively attractive for investors looking to deploy cash, as yield spreads remain on the upper-end of the trading range.

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Municipal Market Update

Municipal prices were mixed daily through Thursday. On Tuesday bonds maturing 10 years and in were steady, while the long-end weakened. On Wednesday the front-end strengthened, while prices on bonds maturing ten years and longer weakened.

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SBA Market Update

Investor interest continued last week in floating-rate SBA pools as yields on these pools have moved higher with Fed rate hikes and spreads have widened over the last several months.  SBA loan applications, approvals and guarantees were not processed during the 35-day government shutdown.

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CMO Market Update

We mentioned last week that the 5-year space tends to be a “sweet spot”, duration and cashflow wise, for many of our investors and it also looks relatively good on an historical spread basis. To that end, this week we have a group of 5-year +/- PAC CMOs to compare and contrast against a current coupon 15yr MBS.

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