Sector Update

July 10, 2017

With only three and a half days of trading last week, the market managed to generate what has recently become a rare level of excitement. Treasury prices continued the selloff from the week prior, declining across the board. Yields on the long-end of the Treasury curve increased 9-10bp for terms fifteen years and greater. Last week left five-year and ten-year Treasuries yields above year-to-date averages for the first time since March. The 2/10yr spread recovered from the low of 79bp it reached last month to 99bp at the end of the trading session last Friday. While the Treasury curve is still not steep, the slope is much more significant than a few weeks ago. On the economic front, Nonfarm Payrolls was released last Friday, surprising to the upside. Treasury yields moved slightly higher on the number, 1-3bp for maturities greater than four years.

Inter-sector yield spreads versus Treasuries did not move as much as Treasury yield movements might imply. Municipal yield spreads versus Treasuries moved slightly wider, 2-7bp. Other sectors hardly moved, if at all, versus Treasuries. MBS prepayments were released last Friday. While prepayments increased by small amounts, the recent uptick in mortgage rates and seasonal nature of the increase in home sales suggest a reversal in the factors that caused the increase, and little adjustment to investment portfolios should be needed at this time based on prepayment trends. For more analysis, please see our June Prepayment Commentary.

Trading was limited last week by time and attendance, as many market participants, on both the buy and sell sides, were absent because of the July 4th holiday. Bond issuance was extremely limited, with municipal bond issuance being virtually nonexistent. This week should bring a much greater issuance volume, helping to make up for last week’s limited supply. A lot of investors still have a wait-and-see attitude, with Friday’s employment data failing to clarify expectations or move yields into new territory. While implied volatility did increase slightly the last few weeks, it is still well below historical levels. It will be interesting to see what impacts last week’s selloff have on investor demand and spreads with a full, five-day workweek and with improved attendance subsequent to the holiday.

Friday’s closing yield of 1.95% for the five-year Treasury was 7bp above the daily closing average year-to-date and was 31bp above the average for the last year of trading. The ten-year Treasury finished the week at 2.39%, 4bp above the year-to-date average for the daily closing yield and 27bp above the average daily close for the last year.


Adjustable Rate Mortgage Market Update

Z-spreads for new-issue hybrid ARMs have tightened by approximately 5 bps over the past two trading weeks. The broader bond market sell-off and steepening of the yield curve has caused prepay fears to diminish, which has helped ARM demand remain steady.

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Agency Market Update

Agency yields benefited from the Treasury market sell-off over the past two trading weeks. Since Friday, June 30th, two-year Agency yields have increased 9 bps to 1.46%, 5-year Agencies climbed by 19 bps to 2.03%, and yields on 10-year Agencies have risen by 25 bps to 2.74%.

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Fixed Rate Mortgage Market Update

Activity improved mid-week in both the MBS and CMO sectors after the holiday and release of the Fed minutes on Wednesday. Yield spreads tightened a couple of basis points last week as Treasury yields moved higher in response to a sell-off in European sovereigns.

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Municipal Market Update

Municipal bond funds recorded outflows for the week, as weekly reporting funds experienced $458.306MM of outflows in the latest reporting week, after experiencing inflows of $496.355MM the week prior. The four-week moving average turned negative at $114.416MM, after being in the green at $246.434MM the week prior.

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SBA Market Update

Trading in both SBA floating-rate and fixed-rate investments was light last week as the second quarter came to a close and managers focused on closing the books in a holiday shortened week. The July DCPC auction was met with soft demand as the market absorbed both 10-year and 20-year debentures.

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