Sector Update

March 25, 2019

Not to be outdone by prior weeks, Treasury yields ended lower again for the third straight week. Treasury’s maturing from 1-30 years closed at their lowest absolute yields for the year. The jump down in yields came in two parts. First, on Wednesday, the results of last week’s FOMC meeting were notably more dovish than expected. Second, on Friday, weak economic readings in France and Germany, added fuel to the fire. The 10yr Treasury on Friday traded, and closed, below the 3mo T-Bill for the first time since 2007.


Spread Commentary

What We’re Reading


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WSJ: Inverted Yield Curve Is Telling Investors What They Already Know

“Recession might be on the way, but so far the yield curve is just telling us that the economy is weakening. And you already knew that.”


WSJ: FHA Clamps Down on Risky Government-Backed Mortgages

“In the previous fiscal year, almost a quarter of FHA-insured mortgages were made to borrowers with a debt-to-income ratio above 50%, having risen sharply in recent years. The average credit score for borrowers fell to 670, the lowest level in a decade. In the FHA’s letter to lenders, it noted a rising concentration of loans with high debt-to-income ratios and low credit scores.”


Bloomberg: One by One, Global Bond Markets Are Flashing the Same Warning

“Treasuries have led a global debt rally amid bets that a rate-cutting cycle is coming. On Friday, the yield on 10-year notes fell below the rate on three-month U.S. bills for the first time since 2007 amid reports showing economic weakness in the U.S., France and Germany.”

Sector Updates

Adjustable Rate Mortgage Market Update

Yield spreads between hybrid ARMs and Treasuries widened 1 to 2 bps last week, despite the second straight week of spread tightening experienced in fixed-rate MBS.  ARMs underperformed their fixed-rate MBS counterparts, with yields tightening on this product approximately 1 to 7 basis points for the week.

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Agency Market Update

Last week agency bullets mostly moved in line with Treasuries.  Bullet yields for maturities of 3 to 5 years fell by approximately 14 to 15 basis points. Agency bullets with maturities of 3 to 5 years are trading at the lowest yields since early 2018.

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Fixed Rate Mortgage Market Update

The strong bond market rally sent yield spreads on current coupon MBS to Treasuries tighter last week, with 15-year tightening 1 bps to 46 bps, while 30-year tightened 7 bps to 65 bps.

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Municipal Market Update

Municipal prices were steady on Monday, mixed on Tuesday and Wednesday, and stronger on Thursday and Friday. Issuance for the week is forecasted to be $8.9B, which is well above last week’s revised level of $2.5B in issuance.

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SBA Market Update

The bond market rally and dovish Fed contributed to increased activity last week in fixed-rate SBICs and DCPC pools, which remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.

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CMO Market Update

For the third consecutive week CMO spreads widened 2 basis points. While spreads for longer Sequentials and PACs extended their highs since 2018, 3 year PACs have just reached a high watermark over the same time period.

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