Sector Update

June 19, 2017

An eventful last week for the market left most yields lower and the Treasury curve flatter. The overall tone of the data released, most notably the lower-than-expected inflationary measures for May, seemed to suggest something a little softer to the bond markets than the rhetoric accompanying the FOMC decision. Treasury yields fell by rather small amounts that were proportional to their term, maxing out at 8bp for the 30yr Treasury. The curves slope continues to gradually erode, and the 2yr/10yr yield spread reached 79bp last Thursday, the lowest since last October.

Ongoing themes caused some variations in outcomes by sector last week. One of these, the ongoing and impressive downward trend in implied volatility, continued to push callable agency spreads closer to their bullet counterparts. MBS spreads might have succumbed to this same pressure were it not for a slight uptick in supply and slight discomfort from the proximity of mortgage rates to prepayment inducing levels. Meanwhile, municipal yield spreads to Treasuries surrendered a small fraction of the sharp tightening from the prior week, with the longer terms finishing wider by 2bp to 3bp. Investment-grade corporate and non-callable agency yield outcomes closely resembled Treasuries.

Brisk trading activity occurred at times last week, though there were also some intervals where portfolio managers seemed to revert back to the “wait and see” attitude prevalent in the prior weeks. An increase in swap related activity did accompany the upticks in prices but without the extensive bid lists that often accompany moves to higher bond prices.

Friday’s closing yield of 1.74% was 14bp below the daily closing average year-to-date and was 15bp above the average for the last year of trading. The ten-year Treasury finished the week at 2.15%, 21bp below the year-to-date average for the daily closing yield and 8bp above the average daily close for the last year. On Wednesday, the ten-year hit its year-to-date low of 2.13%.


Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries were 3 to 4 bps wider on the week, in response to the broader market rally. Strong origination volumes and seasoned selling in the secondary market contributed to the pressure on yield spreads.

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Agency Market Update

Agency yields declined across the curve in response to weaker inflation data and despite the 25 bps rate hike by the Fed. On the week, two-year Agency yields declined 4 bps to 1.37%, 5-year Agency yields fell 4 bps to 1.84%, and yields on 10-year Agencies decreased by 8 bps to 2.53%.

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Fixed Rate Mortgage Market Update

Activity was light last week in both the MBS and CMO sectors as bonds rallied on Wednesday after inflation data fell short of estimates for the third consecutive month. The mid-week Fed meeting offered additional details on QE tapering and the unwind of MBS holdings.

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Municipal Market Update

Municipal bond funds recorded inflows for the week, as weekly reporting funds experienced $394.878MM of inflows in the latest reporting week, after experiencing inflows of $985.092MM the week prior. The four-week moving average was positive at $430.908MM, after being in the green at $438.868MM the week prior.

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SBA Market Update

Floating-rate SBAs benefited from the Prime rate increase last week, with activity somewhat limited by supply. Fixed-rate SBA activity remained slow, with two weeks until the next DCPC auction and limited sellers in the secondary market.

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