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.