Sector Update

June 4, 2018

Small yield declines characterized much of the investment-grade bond market last week. Yields fell sharply Tuesday, with ten-year Treasury yields dipping 15bp. Wednesday’s price action offset much of the Tuesday bond market rally, and Friday also eroded the big move, so ten-year Treasury yields only finished the week 3bp below where they started. The one-year through three-year portion of the curve finished the week with minimal yield changes, and the long end of the curve finished 3-4bp lower.

Not all sectors moved to lower yields the way Treasuries did last week. Mortgage-related securities mostly kept pace, as did non-callable GSE debt. Yields for callable issues held steady or moved slightly higher on the week depending on the structure, as increased rate volatility pushed their spreads slightly wider versus similar non-callable terms. Credit spreads also widened, though a more pronounced widening of yield spreads versus Treasuries early in the week mostly eroded away by Friday.

Portfolio managers gently eased back into the market after Memorial Day, with the lower yields from the Tuesday rally added to the prior week’s yield declines seemingly discouraging some purchases. Some busy periods occurred late in the week, though the shorter week only allowed a brief time to adjust and look for opportunities after the Wednesday selloff.

Friday’s five-year Treasury closing yield of 2.75% exceeded the daily closing average so far this year by 13bp and was 54bp higher than the average since one year ago. The ten-year Treasury finished at 2.930 Friday, 8bp higher than the year-to-date average and 39bp above the average for the last year.


Adjustable Rate Mortgage Market Update

Flows were slower in ARMs last week with the focus on month-end.  Spreads widened modestly in line with other MBS as a result of the risk-off rally. Historically, ARMs have faced headwinds from prepayment risk as they approached $103-dollar price.  However, given the selloff earlier this year, most new issue ARMs are still trading at much lower dollar prices.

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Agency Market Update

Despite last week’s market volatility Agency yields ended the week near where they started, with most of the movement occurring on the short and long ends of the curve, leaving the belly largely unchanged.  Two-year Agency bullet yields decreased 4 bps to 2.53%, 5-year bullet yields dipped 2 bps to 2.82%, and 10-year bullets decreased 4 bps to 3.19%.

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Fixed Rate Mortgage Market Update

Despite a fair amount of volatility in the global bond markets, mortgage yield spreads ended the week close to where they started. 15-year MBS yield spreads ended the week 2bps tighter to Treasuries, while 30-year MBS yield spreads tightened 1bps.

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Municipal Market Update

Prices on municipals started the week on Tuesday stronger across the curve. They were mixed the rest of the week. On Wednesday and Thursday the front-end strengthened, while bonds maturing 10 years and longer were steady. On Friday the front-end strengthened, while bonds maturing 10 years and longer weakened.

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SBA Market Update

SBA activity is expected to pick up this week with focus on the DCPC auction Thursday. While fixed-rate products volumes may have suffered a bit from the lower available yields as debt markets rallied, floaters should seemingly have at least held pace, as much of the market expects a short-term rate increase next week.

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