Sector Update

January 7, 2019



Since our last publication on December 17th, to say markets have been volatile would be quite an understatement. US stock indices are back within throwing distance of where they were and Treasury yields are down 15-20bps on maturities 2-years and longer. US stocks finished up the year with their worst quarter since the Great Depression and their worst year since the Recession. So far this morning, stocks are mildly positive and Treasury yields are up slightly.



Spreads measured week-over-week were largely unchanged with a few notable exceptions. Corporates saw spreads tighten in but still remain relatively wide. Municipals continued tightening, largely on low supply at year end, and investors continue to replace bonds they have maturing/called/pre-refunded in January. In the CMO space, 5yr and longer PACs and SEQs widened and are at or near recent highs.



What We’re Reading

WSJ: U.S. Government Bond Prices Fall After Strong Labor Report

WSJ: The Bond That’s Still Paying Interest, 280 Years Later

Vining Sparks: Market Today

Vining Sparks: Weekly Recap

Vining Sparks: December Monthly Review

 



Adjustable Rate Mortgage Market Update

Since the last ARMs update, yield spreads on hybrid ARMs have widened 1 to 11 basis point (see chart).  The widest spreads can be found in G2 5/1s with 2/2/6 cap structures (11 bps) and FNMA/FHLMC 5/1s with 5/2/5 cap structures (10 bps). 

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Agency Market Update

Even with the holiday-shortened week, there was no lack of volatility in financial markets last week.  Treasury yields ended the week lower and the yield curve flattened somewhat.  The yield curve remains inverted between 1 and 7 years.  Last week agency bullets mostly moved in line with Treasuries.

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Fixed Rate Mortgage Market Update

Despite the fact that Treasury yields moved down slightly on a week over week basis, there was considerable intraweek volatility in the bond market. Yield spreads were relatively unstable as a result. The largest moves came later in the week. On Thursday there was a significant rally in the bond market.

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Municipal Market Update

Municipal issuance was down two-thirds in December 2018 from a year earlier, putting 2018 total volume at $338.0B, nearly a quarter less than the market produced in 2017, which was $448.6B. December 2018 volume came to $21.9B on just 620 transactions, a far cry from the $69.8B on 1,364 deals sold the last month of 2017, when issuers were racing against the tax reform clock to complete deals.

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SBA Market Update

The January fixed-rate DCPC auction is scheduled for later this week and includes 10, 20, and 25yr maturities.  Investors were active last week in floating-rate SBA pools as yields on these pools have moved higher with Fed rate hikes.  Spreads on discount to par priced SBA floater pools have widened over the last month from the mid 30’s to the mid 50’s over 90-day Treasuries.

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CMO Market Update

We will start out the 2019 CMO Commentary with our December Trade Summary followed by a quick look at current spread levels compared back against 2018 data we collect weekly from our trading desk.

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