Sector Update

July 31, 2017



Last week partially reversed the course of the previous week: Treasury yields two years and longer ended the week higher, while short-term rates edged lower. As of this morning, thirty-year yields are 10bp higher than the previous Friday’s close. Meanwhile, the two year is unchanged, the seven year is 4bp higher, and the ten year is 5bp higher.

In terms of investor opportunities, the steepening of the yield curve presented more change than relative value shifts from inter-sector yield spreads. In the most notable, or possibly the only notable relative value shift, municipal yields finished close to or slightly below where they started the week, resulting in yield spreads versus Treasuries tightening 2bp on the short end and 7bp on the long end of the curve.

Early last week, many portfolio managers seemed content with the short end of the yield curve, with both floating-rate and short maturity investments receiving much of the focus. Some portfolio managers seemed to revert back to a wait-and-see mode until after the Fed meeting on Wednesday, which revealed little in the way of direction for the market. As a continuation of the ongoing theme, the timing, nature, and likelihood of expected market influences, such as tax reform, regulatory reform, stimulus, and all matters Fed, continue to challenge decision processes, leaving investors undecided as to the future path of the market. Even with such unresolved issues, market participants still need to remain on target with their goals.

Friday’s closing yield of 1.84% for the five-year Treasury was 4bp below the daily closing average year-to-date and was 16bp above the average for the last year of trading. The ten-year Treasury finished the week at 2.29%, 6p below the year-to-date average for the daily closing yield and 13bp above the average daily close for the last year.

 




Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries experienced a limited amount of daily volatility and were unchanged for the week. The most notable volume in the secondary market consisted of pre-reset 5/1s. Investors were drawn back to this collateral as valuations have cheapened over a point this year.

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Agency Market Update

Agency yields held steady for the short end and moved slightly higher for maturities beyond one year last week, partially reversing declines and the flattening trend from the prior two weeks. The agency market last week featured strong redemptions and net negative issuance, an expected outcome.

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Fixed Rate Mortgage Market Update

Mortgage yield spreads tightened last week, but activity improved as the curve steepened and 10-year Treasury yields moved higher after positive news in Germany. Mortgage rates were essentially unchanged last week and mortgage applications for the week ending July 21 rose 0.4% as refi apps rose 3.4%.

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Municipal Market Update

Municipal bond funds posted inflows for a second week, as weekly reporting funds experienced $322.992MM of inflows in the latest reporting week, after experiencing inflows of $298.554MM the week prior. The four-week moving average turned negative at $2.329MM, after being in the green at $41.012MM the week prior.

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SBA Market Update

Portfolio managers quickly picked up new issue equipment-backed floating-rate SBA pools last week. In addition, investors continued to focus on adding par handle real-estate-backed floating-rate SBA pools to their portfolios.

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