Sector Update

June 5, 2017

The ten-year Treasury ended last week at the lowest yield since November 14th, 2016. A large portion of the curve, representing maturities from seven years to twenty years, underwent weekly declines of 8bp to 11bp. While not especially large weekly declines from a long-term historical context, these represent a significant portion of narrow trading range so far this year; the highest and lowest daily closing yields for ten year Treasuries so far this year are within 49bp of each other. And while weekly declines occurred for all maturities two years and beyond, they were small enough to allow the curve to flatten toward slope levels not seen since last autumn; the two year/ten year yield spread reached 87bp on Thursday, the narrowest since October 5th.

Yield declines in the balance of the bond market tracked closely to Treasuries, with a minor tendency toward smaller declines and therefore wider yield spreads. Spreads across most of the mortgage sector widened by less than 2bp and some municipal debt maturing beyond ten years widened by as much as 4bp versus the Treasury curve. Yield spreads between GSE debt and Treasuries held steady for bullet structures and widened slightly for callable structures, and corporate debt performed similarly.

Activity picked up last week. Cash flow redeployment from recent portfolio paydowns was augmented later in the week by swap related activities and restructuring of portfolios. Many portfolio managers took advantage of higher bond prices to realign portfolios with objectives while booking gains in the process. While it was not large, the rally last week did represent a breakout from the seemingly stagnant markets of the prior weeks and therefore provided a boost to activity.

Five-year Treasuries finished trading Friday at a yield of 1.72%, 17bp below their year-to-date daily closing average and 15bp above the average for the last year of trading. The year-to-date low yield of 2.16% at which the ten-year Treasury traded at the close of business on Friday was 22bp below the year-to-date average and 11bp above the average daily close for the last year.

Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries were 2 to 3 bps wider on the week, likely influenced by the recent pickup in issuance, which provided short-term relief to underwhelming supply in the sector. Hybrid ARM issuance for May remained elevated, with volumes totaling $3.2bn, an increase of 30.8% over the previous month.

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Agency Market Update

Agency yields drifted lower this past week, with most of the movement coming on Friday with the release of the May employment report. On the week, two-year Agency yields fell 3 bps to 1.35%, 5-year Agency yields decreased 8 bps to 1.81%, and yields on 10-year Agencies declined by 10 bps to 2.52%.

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Fixed Rate Mortgage Market Update

Activity improved late last week as bid list inquiries picked up in the MBS and CMO sectors as bonds rallied on Friday. Yield spreads widened a couple of basis points and the curve flattening continued last week. Mortgage rates held at the lowest levels this year and were generally unchanged.

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Municipal Market Update

Municipal bond funds recorded outflows for the week, as weekly reporting funds experienced $50.837MM in inflows in the latest reporting week, after experiencing inflows of $394.498MM the week prior. The four-week moving average remained positive at $344.028MM, after being a positive $388.683MM the week prior. All other funds posted mixed results for the week.

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SBA Market Update

Activity for floating-rate SBAs increased last week, as investors anticipate a continued increase in short-term rates. Fixed-rate SBA activity was steady as portfolio managers continued to add 20-year DCPCs to their portfolios, although demand is lower than the levels experienced earlier this year.

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