Sector Update

January 8, 2018



Small increases across the entire term structure for the last week and the last month constitute a slight deviation from trends observed for much of 2017. Treasury yields for terms ten years and beyond are very close to where they were a year ago, with terms beyond ten years actually lower than a year ago. Meanwhile, Treasuries maturing in five years or less elevated by 40bp or more since a year ago. This pronounced flattening of the curve has slowed since early December, with nearly parallel increases occurring across the term structure.

Investment grade markets moved in like fashion last week with the very pronounced exception of municipal debt. Tax-frees outperformed the balance of the market prominently, as the dust storm of tax changes settled and left cash from recent and ongoing heavy redemptions exposed to declining issuance. Meanwhile, MBS and corporates held mostly steady versus each other and versus Treasuries, with minimal yield spread changes. A slight bias toward tighter spreads versus Treasury benchmarks only deserves mention because of the cumulative effect when added to recent trends.

Portfolio managers eased back into markets last week, as activity picked up in almost all sectors. As financial filings and other calendar-related distractions fade, it seems likely that recent redemptions will continue to support elevated levels of activity. Additionally, many portfolios will need adjustments to realign with goals, objectives, and, in some cases, investment policies.

The ten-year Treasury ended 2017 at 2.41%, 8bp above the 2017 average. The five-year Treasury finished 2017 at 2.21%, 30bp higher than the 2017 closing average.

 



 



Adjustable Rate Mortgage Market Update

There was increased demand for new-issue hybrid ARMs last week, which caused yield spreads to Treasuries to tighten 3 to 4 basis points.  The tightening move came after spreads were largely unchanged for the entire month of December, lagging the performance of fixed-rate MBS, which have tightened at a much more aggressive rate.

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Agency Market Update

Agency prices declined last week, boosting yields higher as investor sentiment remained positive despite a slightly disappointing jobs report.  The US economy added 148,000 jobs in December, undershooting consensus expectations for a gain of 190,000.

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Fixed Rate Mortgage Market Update

Mortgage yield spreads versus Treasuries tightened last week and yield spreads remain historically tight. Mortgage rates rose a couple of basis points, and mortgage applications rose 0.7% from a 1.4% increase in refinance activity. The Refi Index has fallen twelve of the last sixteen weeks and refi activity remains at historically low levels.

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Municipal Market Update

Municipal bond funds reported investors pulled cash out of funds last week, as weekly reporting funds experienced outflows of $47.880MM in the latest reporting week, after experiencing outflows of $180.177MM the week prior. The four-week moving average was positive at $59.882MM, after being in the red at $129.796MM the week prior.

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SBA Market Update

The year started off with strong activity in the SBA sector following the FOMC’s December rate increase.  Depository portfolio managers are adding floating-rate exposure in their investment portfolios as they added a healthy amount of fixed-rate exposure in their loan portfolios in 2017. 

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