Sector Update

May 22, 2017

Yield declines across almost all bond market sectors last week resulted in a flatter term structure of interest rates. In the Treasury sector, all maturities greater than one year finished the week at lower yields, with the sharpest decline, 11bp, occurring at the twenty-year term. While the balance of the week’s mixed economic data presented a slightly less positive view of economic growth expectations, this was probably not enough to justify the movement in rates. Evolution of the political climate probably outweighed the economic data in terms of market impact last week, as prospects of rapid economically stimulative actions from Washington were dampened by waves of political intrigue.

Yield movement in the US Treasury sector represented most other sectors well last week. There seemed to be slightly less flattening overall, most especially in the municipal sector where issues maturing in seven or less years edged tighter to Treasuries by as much as 3bp while issues maturing ten years and beyond widened 2bp to 4bp. Outcomes in other sectors much more closely resembled Treasuries.

Activity levels were only fair last week. While things started off busier than the prior week, it seemed as if bond prices rose just enough to discourage buyers but not enough to excite sellers. New issues were received well, as were the few bid lists that surfaced. Most activity seemed related to redeployment of portfolio cash flows though, as a seemingly larger than usual volume of inquiries and requests for portfolio-related analysis seemed to be stalled by distractions or by the small rally in bond prices, and therefore did not translate to a lot of activity last week.

Five-year Treasuries finished last week at a yield of 1.78%, 12bp below their year-to-date daily closing average and 23bp above the average for the last year of trading. The 2.24% yield at which the ten-year Treasury ended Friday is 16bp below the year-to-date average and 20bp above the average daily close for the last year.

Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries held firm for last week, while fixed-rate MBS experienced a modest tightening in response to the broader bond market rally and flattening yield curve. We continue to see strong demand for new issue 7/1s and 10/1s.

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Agency Market Update

Agency yields were driven lower last week by a global flight to quality. For the week, two-year Agency yields declined by 1 bp to 1.35%, 5-year Agency yields fell 7 bps to 1.88%, and yields on 10-year Agencies were lower by 9 bps to 2.61%.

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Fixed Rate Mortgage Market Update

Activity faded in the MBS and CMO sectors as the week progressed and Treasuries rallied. Higher prices, curve flattening and slightly tighter spreads between MBS and their Treasury benchmarks seemed to create just enough uncertainty to keep many portfolio managers on the sidelines last week.

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Municipal Market Update

Municipal bond funds recorded inflows for the week, as weekly reporting funds experienced $426.721MM in inflows in the latest reporting week, after experiencing inflows of $605.731MM the week prior. The four-week moving average remained positive at $326.188MM, after being a positive $292.065MM the week prior.

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SBA Market Update

Activity for floating-rate SBAs was strong last week, as multiple new issue pools hit the market. Fixed-rate SBA activity was steady as the overall market rallied and investors picked up DCPC paper from the May auction held the previous week.

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