Sector Update

July 24, 2017

Most investment grade bond yields continued to edge lower last week, while short term rates moved slightly higher. US Treasury yields for maturities five years and longer declined 5bp to 10bp, with the largest yield declines for the longest maturities. Short-term yields for maturities one year or less actually increased last week, with 90-day Treasuries and 90-day LIBOR rising 6bp on the week. By Friday the spread between two-year and ten-year Treasury yields closed at 89bp, 10bp above the tightest YTD levels that occurred mid-June. While the changes in yields last week were small, it took all week to achieve them. Ten-year yields declined every day except Wednesday, when they finished unchanged.

Yields in the municipal market behaved independently last week, finishing very close to where they started and pushing to wider spreads versus Treasuries. The balance of the bond market moved in close concert with minor yield spread variations. Interestingly, mortgage sector spreads continued to hold steady in front of this week’s guidance from the Fed as to how they expect to manage their balance sheet.

Activity levels in most sectors last week resembled the week prior. Some portfolio managers’ focus shifted toward balance sheets, as second quarter results revealing progress for the first half of 2017, confirming strategic direction for some and revealing needs for change for others. While it is not quantifiable, the tone of many conversations suggests a very slight shift toward credit concerns as opposed to interest rate concerns, though for most bond portfolio managers the upcoming course of interest rates remains front and center. The timing, nature, and likelihood of expected market influences, such tax reform, regulatory reform, stimulus, and all matters Fed, continue to challenge decision processes, remaining just distant enough to stay out of focus.

Friday’s closing yield of 1.80% for the five-year Treasury was 7bp below the daily closing average year-to-date and was 14bp above the average for the last year of trading. The ten-year Treasury finished the week at 2.24%, 11p below the year-to-date average for the daily closing yield and 10bp above the average daily close for the last year.

Adjustable Rate Mortgage Market Update

Z-spreads for new-issue hybrid ARMs were 2 to 3 bps wider on the week, in response to the increased level of supply from originations and broader bond market rally. In contrast, 15-year fixed rate MBS have tightened 2 to 3 bps over the past two weeks.

Agency Market Update

Agency yields moved lower for the second consecutive week, with most of the movement occurring in longer term finals, resulting in a slightly flatter curve. Two-year Agency yields fell 1 bp to 1.40%, 5-year Agencies declined by 6 bps to 1.88%, and yields on 10-year Agencies decreased by 8 bps to 2.59%.

Fixed Rate Mortgage Market Update

Mortgage yield spreads were mixed and activity was generally slow as Treasury yields grinded lower again last week. Mortgage rates were also mixed last week (15yr down 3bps and 30yr up 1bp) and mortgage applications for the week ending July 14 rose 6.3% with both purchase and refinance applications increasing.

Municipal Market Update

Municipal bond funds reversed course and posted inflows for the week, as weekly reporting funds experienced $298.554MM of inflows in the latest reporting week, after experiencing outflows of $172.555MM the week prior. The four-week moving average was positive at $41.012MM, after being in the red at $256.274MM the week prior.

SBA Market Update

Activity continued to be centered on par handle floating-rate SBA pools, as investors focus on The Fed meetings later this week. Fixed-rate SBA investment was limited last week as supply of DCPC paper in the secondary market continues to be scarce.