Sector Update

June 18, 2018

After a brief hiatus, the yield curve flattening trend resumed last week. Yields for two-year Treasuries climbed 6bp, thirty-year Treasury yields fell 3bp, and ten-year Treasury yields finished 1bp lower. The week lacked the kind of drama and volatility of the prior week, with the Fed announcing the widely expected 2% Fed Funds target and nothing much in the way of surprising economic reports.

GSE yields and spreads in the mortgage sector moved slightly lower relative to Treasuries, with spreads tightening enough to mostly offset about half of the widening that occurred the week prior. Credit spreads versus Treasuries moved a little wider during the week, as the stronger credits and shorter maturities widened by a couple of basis points, while some of the spreads for maturities five years and beyond in the finance sector picked up 4bp or more. Municipal debt also slightly underperformed Treasuries, with most yield spreads widening 2bp to 3bp.

Activity levels picked up again versus the prior week, though overall the pace remained rather slow. Portfolio managers focused on cash balances and reinvestment, as opposed to rummaging through current holdings looking for needed adjustments, and little in the way of bond swapping or portfolio restructuring took place. The relative value shifts occurring during recent weeks apparently were too small to warrant shifts in portfolio compositions, and the recent stall in the movement toward a flat yield curve also contributed to the passive attitude.

Friday’s five-year Treasury closing yield of 2.80% exceeded the daily closing average so far this year by 16bp and was 55bp higher than the average since one year ago. The ten-year Treasury finished at 2.92% Friday, 9bp higher than the year-to-date average and 38bp above the average for the last year.



Adjustable Rate Mortgage Market Update

The strength of the fixed-rate basis to start the week boded well for ARMs, as the sector widened out in sympathy with fixed rates at the end of May and the beginning of June.  If MBS continue to trade well and rates remain rangebound, ARMs should follow suit and retrace some of the recent widening.

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Agency Market Update

The curve flattened on the week with Agency yields moving higher on the front end of the curve, particularly for maturities of 2-3 years, and declining for maturities of 10 years and longer.  Three-year Agency bullet yields increased 4 bps to 2.75%, 5-year bullet yields increased 1 bp to 2.88%, and 10-year bullets declined 3 bps to end the week at 3.22%. 

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Fixed Rate Mortgage Market Update

Mortgages outperformed Treasuries and swaps this past week, as 15-year MBS yield spreads ended the week 3bps tighter to Treasuries, while 30-year MBS yield spreads tightened 1bp. The yield curve continued to flatten last week with the 2/10s spread narrowing from 44bps to just 37bps at the close on Friday. This trend has been a tailwind for the MBS sector as investors have sought defensive structures that provide near-term cash flow.

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Municipal Market Update

Prices on municipals were mixed on Monday and Tuesday. On Monday bonds maturing in the front-end strengthened, while bonds maturing 10 years and longer were steady. On Tuesday the front-end strengthened again, while bonds maturing 10 years and longer weakened. On Wednesday prices weakened across the curve.

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SBA Market Update

The Federal Reserve raised the Fed Funds Target Rate 25bps last week and three additional rate hikes are projected by the Fed this year, which should continue to drive demand in floating-rate SBAs. The day after the Fed raised rates, SBA 7(a) pool factors showed that prepayments increased as well. 

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