Sector Update

June 26, 2017

Small yield movements, tight trading ranges, and small inter-sector yield variations belied a volume of activity last week that, while modest, was greater than the small yield variations suggested. Using ten-year Treasuries as a barometer, an impressive lack of volatility confined yields to a 6bp trading range. The five-year Treasury covered a whopping 7bp range. As measured by trading ranges and yield movements, near stagnant conditions occurred across much of the bond market. This obviously leaves nothing to report in terms of curve shape other than consistency; the slope remains as flat as it has been at any time since last fall.

Inter-sector spreads held mostly steady last week, as most other sectors underwent the same lack of changes as Treasuries. Even municipal yields moved in like fashion with Treasuries, and that sector has been quite prone to move independently during recent months. And while the ongoing progression toward lower implied volatility continued, mortgage-related securities and callable debt spreads versus Treasuries held mostly steady last week.

While trading activity was not heavy last week, portfolios managers were surprisingly busy given the stagnancy of prices and yields. Much of the activity was related to swaps, some of which amounted to minor restructuring of terms and exposures, while in other instances simple bond for bond trades took place. The stability of prices actually accommodated these types of trades even if it failed to induce much in the way of excitement or enthusiasm.

Friday’s closing yield of 1.76% was 12bp below the daily closing average year-to-date and was 16bp above the average for the last year of trading. The ten-year Treasury finished the week at 2.14%, 21bp below the year-to-date average for the daily closing yield and 6bp above the average daily close for the last year.

Adjustable Rate Mortgage Market Update

Demand for new-issue hybrid ARMs picked up last week, which resulted in yield spreads to Treasuries tightening 1 to 2 bps. This was a divergence from the recent trend in which ARMs under-performed fixed rates for most of the month because of heavy supply (issuance) and seasoned selling in the secondary market.

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Agency Market Update

Agency yields were mixed but relatively stable last week. For the week, two-year Agency yields were unchanged at 1.37%, the 5-year Agency yield held firm at 1.84%, and yields on 10-year Agencies decreased by 4 bps to 2.49%.

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Fixed Rate Mortgage Market Update

Activity was light last week in both the MBS and CMO sectors, but did improve later in the week as portfolio managers approach the deadline for quarter end settlement. Bond market volatility remains low after the Fed meeting offered additional details on QE tapering and the unwinding of MBS holdings.

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Municipal Market Update

Municipal bond funds recorded outflows for the week, as weekly reporting funds experienced $890.590MM of outflows in the latest reporting week, after experiencing inflows of $394.787MM the week prior. The four-week moving average was positive at $109.636MM, after being in the green at $430.908MM the week prior.

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SBA Market Update

The combination of recent Fed actions and a host of new issuance yielded high levels of activity in floating-rate SBA pools last week. In addition, fixed-rate SBA investments also saw renewed interest, as recently issued DCPCs traded well in the secondary market.

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