Sector Update

May 14, 2018

Yields edged higher last week, and although small the increases occurred in an almost comprehensive fashion across varying investment grade terms and sectors. The US Treasury curve finished the week at higher yields for all but the longest maturities, 25 years and beyond. Five basis point increases occurred across the three- through five-year terms, pushing the five year to 2.84% on Wednesday, the highest yield for that Treasury term since June 2009.

Yields for Treasuries maturing in less than five years moved higher by slightly greater amounts than most other sectors. These same differences occurred in the swap curve versus Treasury relationship, driving the tighter spreads in the sectors influenced by swap spreads. The mortgage sector moved more similarly to Treasuries than to the swap curve, though yield spreads versus Treasuries did tighten by a basis point or two for some of the shorter structures. The municipal sector managed to express its typical independence even within the small weekly yield changes, with yield spreads versus Treasuries widening across much of the curve, finishing about 5bp wider for the ten-year portion of the curve.

Inconsistent activity volumes last week resulted in an overall pace greater than the two weeks prior, though some intervals seemed quite slow. In addition to redeployment of redemptions and paydowns, a few portfolio managers repositioned along the curve, while others increased their overall bond holdings. Some financial institutions seemed to be returning to more historically normal levels of borrowings, having allowed their balance sheets to de-lever during the very low yields seen last year and the year before. There were also a few trades intended to rebalance portfolios in terms of market sectors and maturity distributions.

Friday’s five-year Treasury closing yield of 2.84% exceeded the daily closing average so far this year by 25bp and was 69bp higher than the average since one year ago. The ten-year Treasury finished at 2.97% Friday, 18bp higher than the year-to-date average and 50bp above the average for the last year.




Adjustable Rate Mortgage Market Update

Yield spreads between hybrid ARMs and Treasuries were unchanged last week, underperforming fixed-rate MBS, which tightened 2 to 3 basis points.  The seasoned selling in the secondary market slowed last week as investors concentrated on buying newer production. 

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Agency Market Update

Agency yields increased across the curve last week, moving in lock-step with the rise in Treasury yields.  Two-year Agency yields increased by 4 bps to 2.59%, 5-year Agency yields improved 5 bps to 2.92%, and yields on 10-year Agencies were higher by 2 bps to 3.27%.

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Fixed Rate Mortgage Market Update

MBS yield spreads versus Treasuries were unchanged to slightly tighter, as Treasury yields rose across the curve from 3-month to 20-year maturities.  On a relative basis, activity in mortgage related securities fared best compared to other sectors last week as mid-week activity was elevated compared to levels experienced this year. 

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Municipal Market Update

Prices on municipal bonds were steady on Monday across the curve and were mixed daily thereafter. On Tuesday the front-end strengthened, while bonds maturing 10 years and longer were steady. On Wednesday the front-end was steady again, while bonds maturing 10 years and longer weakened.

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SBA Market Update

A generally slow period for the SBA still featured some notable highlights. A dual DCPC auction last week resulted in the widest yield spreads for the twenty-year term since last September and the widest ten-year spreads since July. And this morning SBA 7(a) prepayments speeds closed back in on recent average levels, reversing much of last month’s increase.

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