Sector Update

May 21, 2018

Yields increased last week for most of the investment grade market, continuing the recent trend toward higher rates. The way they increased bucked the trend though, with longer-term interest rates rising more than the shorter maturities. The Treasury curve exemplifies this well, with yields for maturities beyond ten years rising 10bp or more, while yields for maturities four years and less only increased 4bp. On Thursday, ten-year Treasury yields reached 3.11%, the highest levels since July 2011, although yields backed off late in the week until it finished at 3.06%.

Yields in other investment-grade sectors increased by as much or slightly more than Treasuries with the exception of municipal debt markets. While mortgage market yield spreads versus Treasuries widened, the amounts were small, generally 2bp or less, and spreads remained steady for much of the sector. GSE debt spreads held steady on the long end and widened by 2-3bp for maturities inside of three years, mirroring the changes in Treasury-swap spreads. While mixed, corporate spreads versus the Treasury curve widened for more names than tightened. Meanwhile, tax-free municipal debt yields lagged Treasuries for the longer maturities, with yield spreads tightening 1-3bp beyond five years.

Portfolio managers busied themselves with the higher yield opportunities last week. Much of the activity focused on short to intermediate maturities, with less focus on terms beyond seven years. Preference for amortizing products that produce current cash flow and on very liquid products seemed greater than usual, especially among banks. Overall volumes surpassed the prior couple of weeks in most sectors.

Friday’s five-year Treasury closing yield of 2.90% exceeded the daily closing average so far this year by 29bp and was 71bp higher than the average since one year ago. The ten-year Treasury finished at 3.06% Friday, 25bp higher than the year-to-date average and 57bp above the average for the last year.



Adjustable Rate Mortgage Market Update

Yield spreads between hybrid ARMs and Treasuries were 1 to 2 basis points wider on the week, as the curve shifted higher, with intermediate- and long-term yields leading the way (10-year Treasury yield reached a seven-year high).

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Agency Market Update

Agency yields increased 5 to 9 basis points last week, with larger movements occurring on longer maturities.  On the week, two-year Agency yields increased 5 bps to 2.64%, 5-year Agency yields increased 5 bps to 2.97%, and yields on 10-year Agencies climbed by 10 bps to 3.37%.

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Fixed Rate Mortgage Market Update

MBS yield spreads versus Treasuries widened, as Treasury yields rose across the curve.  Mortgage rates rose significantly last week, continuing the trend higher this year.  Mortgage applications fell for the fourth consecutive week, as both purchase and refinance applications declined. 

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Municipal Market Update

Prices on municipal in the front-end were steady for the week, while bonds maturing 10 years and longer weakened daily through Thursday. On Friday prices across the curve were steady. Municipal-to-Treasury ratios contracted across the curve through Thursday last week.

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SBA Market Update

Floater activity picked up last week, with increased investor activity in par handle pools and also in shorter-amortization equipment-loan pools. Fixed-rate activity slowed, mostly because the prior week featured a dual DCPC auction and no new paper priced last week.

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