Sector Update

July 17, 2017

Yields edged lower across most of the investment-grade market last week. The belly of the curve moved lower by the greatest amount, with five-year Treasuries declining 9bp, while the wings of the curve only moved a couple of basis points. The slope between two and ten years held on to the increases that had developed mostly over the prior two weeks. The slope between one and five years surrendered 7bp, while the slope from five to ten years picked up 6bp.

Other yield curves in investment-grade markets behaved very much like Treasuries. Not many notable changes in inter-sector spreads occurred. Municipal yields changed very little, resulting in spreads versus Treasuries widening on the week by 2bp to 7bp for high-quality general market paper. Investment-grade corporate spreads widened 1bp to 3bp versus Treasury and swap curve benchmarks. Spreads based on implied volatility and those based on prepayment risk moved very little, with callable agency and mortgage sector spreads showing very little movement against benchmark curves. The most notable changes in relative value on the week were based on the flattening on the short end and steepening beyond the five-year point on benchmark curves and on the small movement in municipal debt yields as other sectors edged lower.

Portfolio managers seemed much more focused last week and increased reinvestment activity occurred, as investors spent cash flows accumulated during the recent wave of redemptions concurrently with increased portfolio adjustments. Some extension trades occurred, as many portfolios had rolled down in maturity during the recent period of slow activity, and there were also a number of trades involving adjustments to convexity and to credit exposures. The expectant atmosphere with regards to environmental changes such as tax reform, regulatory reform, stimulus, and all matters Fed seemed much less charged last week, with more focus on the ongoing details of portfolio management.

Friday’s closing yield of 1.87% for the five-year Treasury was 1bp below the daily closing average year-to-date and was 21bp above the average for the last year of trading. The ten-year Treasury finished the week at 2.33%, 2bp below the year-to-date average for the daily closing yield and 20bp above the average daily close for the last year.


Adjustable Rate Mortgage Market Update

Z-spreads for new-issue hybrid ARMs were mostly unchanged last week, even with the rally in Treasuries. Z-spreads on 10/1s widened by 1 to 2 bps over the past few weeks, reflecting stronger supply levels.

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Agency Market Update

Agency yields declined across the curve last week, moving in lock-step with the rally in Treasuries. Two-year Agency yields fell 5 bps to 1.41%, 5-year Agencies declined by 9 bps to 1.94%, and yields on 10-year Agencies decreased by 7 bps to 2.67%.

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Fixed Rate Mortgage Market Update

Mortgage yield spreads were unchanged to slightly wider last week as Treasury yields moved lower in response to a continuation of weaker than expected inflation data. Mortgage rates rose last week for the second consecutive week and 30-year mortgage rates pushed above 4%.

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Municipal Market Update

Municipal bond funds recorded outflows for a second week, as weekly reporting funds experienced $172.555MM of outflows in the latest reporting week, after experiencing outflows of $458.306MM the week prior. The four-week moving average was negative at $256.274MM, after being in the red at $114.416MM the week prior.

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SBA Market Update

Last week activity in floating-rate SBAs was elevated, as investors added par handle pools and seasoned equipment backed pools to their portfolios. Fixed-rate SBA investment was light last week as supply of DCPC paper was limited and the next auction isn’t until August 10th.

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