Sector Update

March 19, 2018

Investment grade markets followed textbook script closely last week. Yields for shorter maturities edged higher, while longer-term yields fell, a classic response to expectations of tighter fiscal policy amidst moderate economic growth. A symmetrical twist occurred in Treasuries at the three year, with thirty-year yields falling almost 10bp on the week, five-year yields down 2bp, two-year yields up 2bp, and T-bills rising 10bp.

The balance of investment grade markets tracked fairly closely with Treasuries last week. No obvious patterns of spread behavior based on volatility or credit appeared. Municipal debt lagged Treasuries a bit, especially on the long end. Otherwise, it would be difficult to find any meaningful shifts in relative value based on yield relationships.

Portfolio manager activity picked up last week in terms of numbers of participants and size of business executed. The pace held throughout the week. Interest in new deals pricing boosted investor interest at times, and while things slowed down some at times, there were few of the lulls in investor activity seen over the prior few weeks. Redeployment of cash still seemed to overshadow interest in portfolio adjustments, though portfolio reviews and discussions definitely picked up last week.

Friday’s five-year Treasury closing yield of 2.64% exceeded the daily closing average so far this year by 14bp and was 62bp higher than the average since one year ago. The ten-year Treasury finished at 2.85% Friday, 11bp above the year-to-date average and 46bp above the average for the last year.


Adjustable Rate Mortgage Market Update

Yield spreads between new-issue hybrid ARMs and Treasuries were unchanged last week, while the curve flattened and yield spreads for fixed-rate MBS tightened approximately 2 basis points.  The 2-year/10-year Treasury spread declined 8 basis points for the week and is currently at 55 basis points.

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Agency Market Update

The curve flattened on the week with yields on Agencies moving higher on the short-end and belly of the curve, and declining for maturities 10 years and longer.  Curve flattening was the dominant theme in the Treasury market. 

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Fixed Rate Mortgage Market Update

MBS yield spreads versus Treasuries were mixed as the curve flattened and mortgage rates fell last week.  Mortgage applications rose for the third consecutive week and refi apps rose 2.2%; however, refinance activity continues to be historically low and range-bound.  The February housing starts and building permits reports were both weaker than expected.

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Municipal Market Update

Municipal bond funds reported investors put cash into funds for a second week, as weekly reporting funds experienced inflows of $339.142MM, after experiencing inflows of $406.753MM the week prior. The four-week moving average was a positive $125.589MM, after being in the red at $70.049MM the week prior.

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SBA Market Update

Last week’s calendar featured prominent events for both fixed- and-variable rate SBA markets. March prepayments speeds slowed in an unsurprising way considering seasonal factors and day count, while the semi-annual SBIC auction offered a major boost at a time when flows in the fixed-rate SBA sector had been suppressed by a lack of supply.

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