Sector Update

May 1, 2017

Small yield increases occurred across most of the bond market last week. Treasury yield increases of 4bp to 7bp for all maturities one year and beyond did little to change the shape of the yield curve, suspending the two-month long flattening trend for a week. The week featured more tension than information. A light economic calendar last week and the absence of major new news stories left markets to dwell on ongoing concerns abroad, a pending FOMC rate decision this Wednesday, and a very heavy economic calendar for this week.

While many portfolio managers took a wait-and-see attitude last week, quite a bit of business was still transacted. A small but nonetheless welcome uptick in rates invited some cash accumulated during the recent rally back into the market, and there were also significant restructuring trades – selling bonds to fund purchases that realigned portfolios with investment objectives or balance sheet needs. Activity was spread across a variety of durations and the overall pace was in line with recent weeks.

Few notable changes occurred in inter-sector spreads last week. Credit spreads inched in a bit, pushing investment-grade corporate spreads versus Treasuries 1bp to 3bp tighter. Municipal spreads benefitted from this and also perhaps from changes in expectations as to the timing and exact nature of pending changes to tax codes. Nothing monumental changed – the provisions described last week were generally in line with previous discussion. However, the lack of detailed information implied a longer timeline than many expected. And while elimination of AMT had already been discussed, naming it as a key facet of the plan also changed the perceived likelihood in the minds of some listeners. This and other perceptions tilted in such a way as to slightly benefit municipal debt and pressured spreads slightly tighter.

Five-year Treasuries finished last week at a yield of 1.81%, 9bp, below their year-to-date daily closing average and 30bp above the average for the last year of trading. The 2.28% yield at which the ten-year Treasury ended Friday is 13bp below the year-to-date average and 27bp above the average daily close for the last year.