Sector Update

June 25, 2018

Other than a one-day flight-to-quality rally, investment-grade debt markets moved in a mostly directionless fashion last week and remained confined in narrow trading ranges. Treasuries maturing in two years and less finished the week close to or on top of the yields where they started, while yields for the belly of the curve finished 2-3bp lower. A sudden rally Tuesday more or less reversed itself within the trading day, and recent risk–off motivated rallies seem to trend toward progressively shorter periods of time.

While yield spreads between other investment-grade products and Treasuries moved sharply wider for a brief time Tuesday, yields across most other sectors netted similarly small changes to Treasuries for the week as a whole. Without the short-lived flight to quality (actually more like a hop than a flight) the only really noteworthy change in yield spreads might be the widening of spreads for one-, two-, fifteen-, and thirty-year municipal debt versus Treasury yields.

Activity levels improved versus the week prior for most investment-grade products. The brief rally inspired some portfolio managers. While the price increases ended up being short-lived, they served as a reminder that market prices can move quickly in either direction. This might explain an increase in focus on portfolio reports and a modest renewal of interest in extension swaps, though the rapidly approaching quarter-end doubtless served as motivation as well.

Friday’s five-year Treasury closing yield of 2.77% exceeded the daily closing average so far this year by 13bp and was 50bp higher than the average since one year ago. The ten-year Treasury finished at 2.90% Friday, 6bp higher than the year-to-date average and 34bp above the average for the last year.

Adjustable Rate Mortgage Market Update

Yield spreads between new-issue hybrid ARMs and Treasuries were 1 to 2 bps wider last week, while the curve flattened and yield spreads for fixed-rate MBS widened approximately 1 to 2 bps. Last week marked the start of the origination cycle in ARMs, as smaller pieces traded from a variety of servicers.

Agency Market Update

For the second consecutive week, the curve flattened with yields on Agencies unchanged or declining across the curve, as a revival of U.S.-proposed tariffs on Chinese goods and a swift retaliation overseas sent the markets into retreat. Two-year Agency yields were unchanged at 2.61%, 5-year Agency yields fell 3 bps to 2.85%, and yields on 10-year Agencies were lower by 2 bps to 3.20%.

Fixed Rate Mortgage Market Update

Mortgages traded mostly in line with the Treasury curve this past week. Current coupon 15-year MBS yield spreads ended the week 1bp wider to Treasuries, while 30-year MBS yield spreads widened 2bps. Mortgage rates and volatility moved in a narrow range this week as the economic data was relatively light.

Municipal Market Update

Prices on municipals were steady across the curve on Monday. On Tuesday they strengthened across the curve. Starting on Wednesday prices were mixed daily for the rest of the week. On Wednesday the front-end strengthened while intermediate maturities weakened and the long-end was steady.

SBA Market Update

The Federal Reserve raised the Fed Funds Target Rate 25bps recently and two additional rate hikes are projected by the Fed this year, which should continue to drive demand in floating-rate SBAs.

CMO Market Update

Buying was in line with the previous week. Over the past few days, if there has been any consistency in what portfolio managers have been investing in, it appears to be 4.0 percent coupons generally priced in the $103 arena.