Sector Update

March 12, 2018

A narrow trading range left investment grade markets little changed for the course of last week. Ten-year US Treasuries only traversed a yield range 9bp wide and finished 3bp higher from Friday to Friday. No point on the curve netted more than a 4bp yield change. For most of the week, yields wobbled around at levels slightly lower than where they started Monday and finished on Friday.

The balance of the investment grade markets mostly finished closer to where they started last week, and yield spreads between Treasuries and most other sectors compressed slightly. Narrowing of trading ranges during the last two weeks pushed implied volatility downward. The jump in implied volatility around the end of January had pushed spreads outward. Quieter markets should at the very least hold yield spreads for MBS and debt structures featuring call options in check as long as they hold out. Municipal markets also surrendered a basis point or two versus Treasuries, though in their case technical factors related to issuance and redemption volumes extended the ongoing spread tightening trend.

Portfolio manager activity last week broadened, though the greater number of participants in the market only resulted in modest increases in activity. Unlike the prior week, relatively steady volumes occurred each day. Redeployment of redemptions explained much of the activity, and cash that built up due to a “wait and see” attitude induced by the intense volatility of a few weeks ago augmented current redemptions. Minimal bond switching and restructuring occurred last week, despite portfolio impacts from recent changes in prepayment expectations. Most of what occurred in this type of activity involved extension swaps in the municipal sector.

Friday’s five-year Treasury closing yield of 2.65% exceeded the daily closing average so far this year by 16bp and was 63bp higher than the average since one year ago. The ten-year Treasury finished at 2.90% Friday, 17bp above the year-to-date average and 51bp above the average for the last year.





Adjustable Rate Mortgage Market Update

Yield spreads between new-issue hybrid ARMs and Treasuries were stable last week.  As depicted on the graph below, final issuance for February totaled $1.26bn, a decline of $249mm from the previous month.  7/1s outpaced all other reset types with $461mm in issuance, accounting for 36% of total originations in the sector

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Agency Market Update

Agency yields increased across the curve last week, moving in lock-step with the rise in Treasury yields.  Treasuries moved little last week, but yields were pushed slightly higher by Friday’s strong employment report.  Two-year Agency yields increased by 2 bps to 2.30%, 5-year Agency yields improved 3 bps to 2.73%, and yields on 10-year Agencies were higher by 3 bps to 3.19%.

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Fixed Rate Mortgage Market Update

MBS yield spreads versus Treasuries tightened last week, while mortgage rates rose, continuing the trend higher this year.  Mortgage applications rose for the second consecutive week and refi apps rose 1.5% after previously falling for three consecutive weeks. 

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Municipal Market Update

Municipal bond funds reported investors put cash into funds, as weekly reporting funds experienced inflows of $406.753MM, after experiencing outflows of $590.943MM the week prior. The four-week moving average was a negative $70.049MM, after being in the red at $3.010MM the week prior.

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SBA Market Update

Most of the ongoing trends in the SBA sector continued into last week. Fixed-rate SBA investment activity included a well-bid DCPC auction. Floating-rate activity maintained a focus on lower-priced pools, though activity in premiums continues to improve as understanding prepayment patterns subsequent to last fall’s implementation of principal distribution timing changes improves.

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