Sector Update

March 26, 2018

While investment grade yields crept almost universally lower last week, not enough movement occurred to provide any solid evidence of new trends or make pronouncements about changes in investors’ outlooks. The five year netted the largest decline of any point on the Treasury curve, 4bp, and the wings of the curve declined by as little as 1bp for some maturities. Minimal market movements occurred in conjunction with the widely anticipated 25bp upward adjustment to the overnight-rate target by the Fed, and the balance of news and data also failed to surprise much of anyone.

Municipal debt yields mostly held fast last week, and as a consequence yields spreads versus Treasuries widened by 1bp in the long and short end to as much as 5bp for the five year, where the greatest yield decline occurred for Treasuries. Mortgage yields spreads versus Treasuries also widened by small amounts, as did U.S. agency spreads. Corporate debt spreads widened by greater amounts, especially on the short end.

Portfolio manager activity dropped off slightly last week versus the rather busy prior week. Early in the week, some seemed to pause in case the Fed produced a surprise on Wednesday. Late in the week inquiries did pick up in some product sectors.  Redeployment of cash remained the dominant theme, with more investors comparing the relative virtues of potential purchase candidates than considering portfolio adjustment, a common situation with an approaching business quarter-end.

Friday’s five-year Treasury closing yield of 2.60% exceeded the daily closing average so far this year by 8bp and was 56bp higher than the average since one year ago. The ten-year Treasury finished at 2.81% Friday, 7bp above the year-to-date average and 42bp 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, as the broader bond market moved up in price, sending yields slightly lower across the curve.  ARMs outperformed their fixed-rate MBS counterparts, with yield spreads widening on this product approximately 2 to 4 basis points for the week. 

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Agency Market Update

Agency yields declined across the curve last week, moving in lock-step with the rally in Treasuries.  Two-year Agency yields fell 3 bps to 2.34%, 5-year Agencies declined by 3 bps to 2.72%, and yields on 10-year Agencies decreased by 3 bps to 3.12%.

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Fixed Rate Mortgage Market Update

MBS yield spreads versus Treasuries widened as Treasury yields fell across the curve.  Mortgage rates rose last week continuing the trend higher this year, while mortgage applications fell for the first time in a month.  Refi apps fell 4.5% after falling 2.2% the prior week.  Refinance share of mortgage applications (38.5%) fell to the lowest level since 2008. 

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Municipal Market Update

Municipal bond funds reported investors put cash into funds for a third week, as weekly reporting funds experienced inflows of $445.450MM, after experiencing inflows of $339.142MM the week prior. The four-week moving average was a positive $150.101MM, after being positive $125.589MM the week prior.

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SBA Market Update

The SBA sector quieted down last week, as investors digested the prepayment numbers for floaters and boost of supply via the SBIC auction from the week prior. Considering the lack of new inputs, the business pace actually sustained itself surprisingly well, while supplying little in the way of news worthy print. 

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