Sector Update

July 2, 2018

Yields for US Treasuries fell last week and yields across most of the balance of the investment grade bond market drifted lower as well. While most analysts and economists attributed the yield decline to anxieties about international trade and international debt woes, it occurred without drama and yields only fell by small amounts. Treasury yields for maturities beyond three years fell 4bp to 5bp on the week with smaller declines at the short end of the curve. Most of the bond price increases occurred Wednesday, with rather small intraday moves earlier and later in the week.

Whatever market anxieties that might have buoyed Treasury prices last week failed to manifest themselves in yield relationships between sectors. Mortgages, corporate debt, municipal debt, and US agencies all moved to slightly lower yields last week with more instances of tighter yield spreads versus Treasuries than wider spreads. MBS yields closed in on similar duration Treasuries by a couple of basis points and credit spreads mostly held steady. Callable debt spreads interestingly pushed a bit wider despite the lack of large intraday bond price swings last week. While municipal debt spreads moved around quite a bit, they netted little change on the week.

Activity levels tapered off in general last week. Some portfolio managers adjusted positions for the quarter end providing sporadic volumes of activity while the overall pace of inquiries and trades seemed more anemic. Municipal markets defied other sectors, with traders fielding heavy volumes of inquiries accommodating portfolio managers swapping bond positions and also spending cash.

Friday’s five-year Treasury closing yield of 2.74% exceeded the daily closing average so far this year by 9bp and exceeded by 46bp the average for the last year. The ten-year Treasury finished at 2.86% Friday, 1bp higher than the year-to-date average and 28bp above the average for the last year.

Adjustable Rate Mortgage Market Update

The contraction of primary/secondary spreads this year should help new issue ARM performance if rates continue to grind lower.  In 2016, the dollar price on production coupon new issue 7/1s was generally ~103, and in 2017, new issue 7/1s hovered in the 102s.

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Agency Market Update

Agency yields declined across the curve last week, moving in line with the flattening Treasury curve.  Two-year Agency bullet yields decreased 2 bps to 2.59%, 5-year bullet yields increased 3 bps to 2.82%, and 10-year bullets fell 4 bps to 3.16%.

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Fixed Rate Mortgage Market Update

Mortgages modestly outperformed Treasuries this past week. Current coupon 15- and 30-year MBS yield spreads tightened approximately 2bps to Treasuries.  The yield curve continued to flatten this week, opening at 35bps and closing 2bps lower at 33bps.

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Municipal Market Update

Prices on municipals were steady across the curve on Monday and then mixed daily for the rest of the week. On Tuesday the front-end was steady, while bonds maturing 10 years and longer weakened. On Wednesday the font-end was again steady, while bonds maturing 10 years and longer strengthened.

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SBA Market Update

SBA activity during the holiday shortened week is expected to be focused on the DCPC auction Thursday, which includes 10yr and 20yr terms and may also include a 25yr term. The Federal Reserve raised the Fed Funds Target Rate 25bps recently and two additional rate hikes are projected by the Fed this year, which should continue to drive demand in floating-rate SBAs.

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CMO Market Update

Investors continue to favor short cashflow structures. For the month of June, investors favored fixed-rate CMOs but there was still good activity in floating-rate CMOs.

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