Sector Update

July 16, 2018

Very small net yield changes disguised increased levels of investor activity in many investment-grade sectors last week. No point on the US Treasury curve finished Friday more than 4bp from closing levels the week prior. Yields edged higher early in the week, with the ten-year Treasury reaching 2.88% on an intraday basis before prices bounced on Tuesday with the yield “plummeting” to 2.82% on Wednesday, then edging up again on Thursday and reversing again on Friday.

While no large variances in yield movement between sectors occurred last week, a couple of noteworthy changes occurred. Investment-grade corporate yields edged closer to Treasuries, with most yield spreads moving 2bp to as much as 5bp tighter, as concerns about potential economic impacts of increasing international trade barriers seemed to wane. Meanwhile, callable agency and other structured debt spreads moved wider despite the lack of bond market volatility. Mortgage markets and municipal markets tracked Treasuries pretty closely during the week.

A “normal” business week, without holidays or quarter-end distractions, seemed to result in renewed focus by many portfolio managers last week. While activity improved across a variety of product types, the wings of the curve improved more than the belly. Activity in floating-rate securities and also in longer duration products, including municipal debt and mortgage-related securities, improved noticeably.

Friday’s five-year Treasury closing yield of 2.73% exceeded the daily closing average so far this year by 8bp and exceeded by 41bp the average for the last year. The ten-year Treasury finished at 2.83% Friday, 1bp lower than the year-to-date average and 24bp above the average for the last year.


Adjustable Rate Mortgage Market Update

ARMs flows were quiet last week but should pick up this week as the bulk of July origination comes to market.  The fixed-rate basis has tightened versus Treasuries to start the month.  New issue ARM spreads, on the other hand, have been stagnant to start the month, despite beginning at more attractive valuations following the widening and underperformance in June. 

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Agency Market Update

Last week the Treasury curve continued its recent flattening trend, and Agency yields moved largely in line with Treasury yields.  On Friday the spread between 2- and 10-year Treasuries reached its lowest point of this economic cycle at 25 basis points.

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Fixed Rate Mortgage Market Update

MBS spreads remained stable to both Treasuries and Swaps this week. The yield curve continued its flattening trend with 2s/10s opening at 28bps and closing 3bps lower at 25bps, which is the lowest level since 2007. The average rates on 30-year fixed and 15-year fixed mortgages remained relatively stable during the past week.

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Municipal Market Update

Prices on municipals were unchanged across the curve on Monday and were mixed daily the rest of the week. On Tuesday bonds maturing 10 years and in were steady, while bonds maturing on the long-end strengthened. On Wednesday bonds maturing 10 years and in strengthened, while the long-end was steady.

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SBA Market Update

BA activity continues to be focused on floating rate equipment pools offered at par and premium pricing as yields on SBA floating rate pools moved higher last week.  Investors are also active in DCPC fixed rates, which are trading at the widest yield spreads in over a year.  SBA prepayments were mixed:  real estate loan pools slowed, while equipment loan pools experienced faster speeds.

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CMO Market Update

The CMO sector saw strong demand from depositories last week. Much of the activity was follow through from portfolio managers who lined up and evaluated trades the prior holiday-shortened week. Typical as of late, activity was dominated by outright cash purchases.

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