Sector Update

March 5, 2018



Despite some intraday choppiness, investment grade markets finished last week very close to where they started. No point on the US Treasury curve netted more than a 2bp change for the five trading days ending Friday. The Treasury yield curve did continue to flatten though, albeit by only 2bp based on the 2yr/10yr yield spread.

Yields in some of the other investment grade sectors moved more than Treasuries last week. Municipal debt yields moved higher, with tax-free yield spreads versus Treasuries increasing by 2bp to as much as 8bp for some of the longer terms. Corporate debt yields finished the week flat to slightly lower, resulting in 1bp to over 5bp of spread tightening versus Treasuries for some of the bigger A-rated names. Yields in the mortgage sector finished close to where they started, and Treasury yield spreads for that sector finished unchanged to 2bp wider.

While portfolio managers started the week sluggishly, by the end of the week many of them came to market and displayed their greatest sense of urgency in recent weeks. A selloff Monday and early Tuesday failed to follow through. This seemingly instilled confidence and, combined with a favorable yield environment, encouraged spending from cash accumulations built up while many managers awaited calmer markets through several weeks of turmoil.

Friday’s five-year Treasury closing yield of 2.63% exceeded the daily closing average so far this year by 14bp and was 61bp higher than the average since one year ago. The ten-year Treasury finished at 2.86% Friday, 15bp above the year-to-date average and 48bp above the average for the last year.

 

 






Adjustable Rate Mortgage Market Update

Yield spreads between new-issue hybrid ARMs and Treasuries widened 1 to 2 basis points last week.  Spreads have been relatively stable partially because of the lack of supply in the market. Preliminary estimates for February indicate originations totaled $1.26 billion, a decline of 16.4% from the previous month. 

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Agency Market Update

Agency yields were mixed on the week with modest increases on shorter-term maturities and small declines for longer-term maturities, resulting in a slightly flatter curve.  For the week, two-year Agency yields moved higher by 1 bp to 2.28%, the 5-year Agency yield improved 2 bps to 2.70%, and yields on 10-year Agencies fell 1 bp to 3.16%.

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Fixed Rate Mortgage Market Update

The mortgage market experienced minimal change in yield spreads versus Treasuries, as mortgage rates and curve slope were unchanged last week.  Mortgage applications rose for the first time in three weeks, while refinance activity fell for the third consecutive week and continues to be historically low and range-bound. 

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Municipal Market Update

Municipal bond funds reported investors pulled cash out of funds, as weekly reporting funds experienced outflows of $590.943MM, after experiencing inflows of $347.403MM the week prior. The four-week moving average was a negative $3.010MM, after being positive at $203.707MM the week prior.

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SBA Market Update

Activity in low- to moderate-premium SBA floaters increased slightly last week, as portfolio managers digest recent prepayment data and continue to anticipate further tightening by The Fed.  With supply being limited, activity has been tempered in fixed-rate investments lately, however depository managers will look to add DCPCs from the March auction later this week. 

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