Sector Update

July 9, 2018



Minimal yield curve changes occurred last week. With two business days straddling each side of the July 4th holiday, yields for many points on the Treasury curve show the exact same closing yield numbers for Monday through Thursday. Monday and Friday both contributed to a continuation of the yield curve flattening trend, with long-end Treasuries surrendering 4-5bp for the week while maturities inside of two years edged 2-3bp higher.

Other investment-grade sectors moved in ways closely resembling Treasuries last week with minimal changes in yield spreads. A portion of the implied volatility based spread increases that occurred the week prior in callable agency structures and longer CMOs reversed, resulting in a basis point or two of tightening in those products. Credit spreads, including municipal market yield spreads versus Treasuries, made little progress in either direction for the week.

The combination of a mid-week holiday, low issuance for most sectors, and summer doldrums suppressed activity for the week in general. Bouts of brisk activity did occur though. Portfolio managers seemed most interested in the portion of the yield curve from four to seven years or so.

Friday’s five-year Treasury closing yield of 2.72% exceeded the daily closing average so far this year by 7bp and exceeded by 41bp the average for the last year. The ten-year Treasury finished at 2.82% Friday, 1bp lower than the year-to-date average and 25bp above the average for the last year.

 






Adjustable Rate Mortgage Market Update

One notable development over the past two months has been the precipitous decline in G2 supply.  Supply in June was down 60% from May, and July is on pace to be even lower.  Most of the decrease can be attributed to the newly implemented VA net tangible benefit test as borrowers need 2% rate savings to streamline refinance from a fixed-rate mortgage into an ARM.

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Agency Market Update

The Treasury curve continued to flatten last week, and Agency yields moved mostly in line with US sovereign debt yields.  Two- and three-year Agency bullet yields increased 1 basis point to 2.60% and 2.70%, respectively, and 5-year bullet yields decreased 2 bps to 2.80%.  Ten-year Agency bullet yields fell 4 bps to 3.12%. 

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Fixed Rate Mortgage Market Update

MBS yield spreads versus Treasurieswere largely stable this week by most measures.  Valuations have improved during the first half of 2018, with LIBOR OAS widening by approximately 14bps on current coupon 30-year MBS.  The yield curve continued its flattening trend, opening at 33bps and closing 4bps lower at 28bps, which is the lowest level since 2007.        

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Municipal Market Update

Prices on municipals were mixed, as the front-end weakened and bonds maturing 10 years and longer were steady. On Tuesday prices strengthened across the curve. On Wednesday the market was closed in observance of the July 4th holiday. On Thursday bonds maturing 10 years and in were steady, while the long-end strengthened.

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SBA Market Update

SBA activity during the holiday-shortened week was light as expected, but was focused on the DCPC auction last Thursday, which included 10yr and 20yr terms priced at the widest yield spreads in over a year.  The DCPC auction also included a new 25yr term.

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CMO Market Update

The holiday-shortened week took a toll on activity as month- and quarter-end aligned with a mid-week holiday. What we did see late last week was portfolio managers beginning to line up and evaluate trades as month- and quarter-end pressures eased up and they probably had some free time to devote to it.

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