Sector Update

May 15, 2017

Another week notable for lack of bond market volatility just occurred. Treasuries maturing between two years and ten years finished the week 2bp to 3bp lower. No point on the Treasury curve finished the week with yields more than 3bp from where they started. Small short-lived mid-week yield increases did push the ten year to the highest yield levels since March, though these increases faded as the weekend approached.

Yields in the mortgage sector moved less than Treasuries last week, with MBS yields ending almost exactly where they started. As a consequence, mortgage sector spreads to the Treasury curve tightened a couple of basis points. Corporate spreads also edged wider, with high investment grade spreads at the five-year point widening by as much as 5bp for some names. Municipal spreads also widened 3bp to 8bp or more in some cases.

While many portfolio managers were active last week, changing market conditions were obviously not the primary cause. Most were addressing changes within portfolios. As maturities rolled down and cash flows came in, some mangers remained sidelined. An extended period or relative quiet seems to be allaying fears of what many forecasted to be volatile times in bond markets. The small elevation of yields midweek and the modest widening of many yield spreads versus benchmarks seemed to be just enough inspiration to instigate activity in sectors that had been quiet, such as CMOs and ARMs. Meanwhile, activity in other sectors that had been busy, notably SBAs and other floaters, slowed last week leaving the overall pace of activity slightly above what has been typical the prior few weeks.


Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries were relatively stable, widening by approximately 1 basis point for the week. Demand for ARMs continues to be steady because of wider spreads relative to earlier in the year, investors positioning for higher interest rates, and tightening spreads in the fixed rate mortgage sector.

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Agency Market Update

Agency yields rose for most of the week and then reversed course on Friday with the release of weaker-than-expected core inflation data for April. For the week, two-year Agency yields declined by 3 bps to 1.36%, 5-year Agency yields fell 4 bps to 1.95%, and yields on 10-year Agencies were lower by 3 bps to 2.70%.

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Fixed Rate Mortgage Market Update

Small price declines and slightly wider spreads between MBS and their Treasury or Agency benchmarks seemed to have created just enough of a value shift to inspire many portfolio managers to act last week. As the week wound down, activity slowed back down.

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Municipal Market Update

Municipal bond funds recorded inflows for the week, as weekly reporting funds experienced $605.731MM in inflows in the latest reporting week, after experiencing inflows of $127.783MM the week prior. The four-week moving average remained positive at $292.065MM, after being a positive $547.560MM the week prior.

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SBA Market Update

Demand for floating-rate SBA structures continues to be steady, although new issue supply is limited. For now, demand for 10-year and 20-year structures are being met with secondary offerings of seasoned pools. Fixed-rate SBA demand was satisfied last week with the May auction of 10-year and 20-year DCPC paper.

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