Sector Update

March 11, 2019



Last week, Treasury yields had their largest week-over-week decline of the year and closed right at their 2019 lows. The Treasury curve flattened with the 2yr down 8bps and maturities 3yrs and longer down by 12-15bps. The move down in yields reflects weaker than expected growth in China and Europe, noisy U.S. economic data, and a Fed that is willing to “wait and see how those conditions evolve before we make any changes to our interest-rate policy.”

 

Spread Commentary



What We’re Reading

 

Vining Sparks: MBS Prepay Commentary | Market Today  | Weekly Recap

 

WSJ: Muni Bonds Enjoy Historic Run Despite Tax Overhaul

“Investors poured more than $15 billion into municipal-bond funds in the first eight weeks of the year, the most over that period in at least 13 years, according to net inflows tracked by research firm Municipal Market Analytics.”

 

WSJ: Wall Street Votes to Support Single Bond for Fannie, Freddie

“The vote by Wall Street’s largest trade group, the Securities Industry and Financial Markets Association, is the final hurdle for the proposed new security—which is expected to launch in June as part of a revamp to the $5 trillion market in bonds guaranteed by the mortgage-finance firms.”

 

WSJ: Europe’s Most Important Bond Edges Back Toward Negative Territory

“Investors have driven the eurozone’s most closely followed government bond yield close to negative territory for the first time since 2016, underscoring the increasingly bleak outlook for the European economy.”

 



Adjustable Rate Mortgage Market Update

Z-spreads for hybrid ARMs were 3 to 9 bps tighter on the week, compared to a modest tightening for fixed-rate MBS, amidst a rally in prices for the broader bond market. Hybrid ARM spreads tightened in the month of February, lagging the performance of fixed-rate MBS, which have tightened at a slightly more aggressive rate.

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Agency Market Update

Agency bullets basically moved in lockstep with sovereign debt, while callable agencies ended their months long tightening trend.  Over the past 2 months, 3-year bullet spreads have been halved and 5-year agency bullets have tightened in to 11 basis points (compared to 17 basis points in early January).

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Fixed Rate Mortgage Market Update

Yield spreads on current coupon MBS to Treasuries were mixed last week with 15-year widening 2 bps to 50 bps, while 30-year tightened 2 bps to 73 bps. Depositories continue to be active in the MBS space with the bulk of activity being in the 15- and 20-year sectors, across nearly all coupons.

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Municipal Market Update

Municipal prices were steady on Monday and Tuesday across the curve. They were mixed the rest of the week. Issuance this week is forecasted to be $5.5B, which is above last week’s revised level of $4.5B in issuance.

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SBA Market Update

The March fixed-rate DCPC auction last week included 10, 20, and 25yr maturities.  Issuance increased 47% MoM and issuance in the 20yr term reversed its 6-month decline, while yield spreads versus Treasuries tightened 4bps.

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CMO Market Update

CMO spreads to Treasurys widened 2bps last week. In the 5-10 year space, spreads remain at their widest levels since 2018.

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