Sector Update

May 29, 2018

Yields declined across US Treasury, GSE and high grade corporate markets last week, reversing course from the two weeks prior. Treasury yield movements retraced the week prior very closely, with yields across all maturities two years and beyond declining by over 10bp. Most of last week’s movements occurred Wednesday through Friday, as a risk-off sentiment overshadowed relatively quiet bond market activity.

Despite the risk-off nature of last week’s bond market strength, prices moved higher across more than just the US Treasury sector. Yield declines for Agency debt and mortgage-related securities almost kept pace with Treasuries during the rally, with only minor widening of yield spreads. Municipal markets behaved independently as they are so often prone to do. Yields across the longer end of the municipal sector, ten years and beyond, actually finished the week about where they started, as spreads there widened by 8-12bp.

Portfolio managers suffered from pre-holiday lethargy last week and, despite the higher prices, inquiries and trades fell off from prior weeks’ volumes. Most of what occurred consisted of outright purchases as opposed to restructuring or adjustment of portfolio holdings.

Friday’s five-year Treasury closing yield of 2.77% exceeded the daily closing average so far this year by 15bp and was 57bp higher than the average since one year ago. The ten-year Treasury finished at 2.93% Friday, 12bp higher than the year-to-date average and 43bp above the average for the last year.



Adjustable Rate Mortgage Market Update

Yield spreads between hybrid ARMs and Treasuries widened slightly last week, 2bp or so on average. It was a fairly active week for ARMs relative to the quiet across the balance of the bond market with continued seasoned selling, mostly in longer reset pools with lower coupons, supplementing the ongoing demand for current production pools.      

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Agency Market Update

A flight to quality amid ongoing political uncertainties in Europe sent Agency yields lower across the curve, with the most movement occurring in longer-term maturities (5+ years).  Two-year Agency yields decreased by 7 bps to 2.57%, 5-year Agency yields fell 12 bps to 2.85%, and yields on 10-year Agencies were lower by 13 bps to 3.23%.

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Fixed Rate Mortgage Market Update

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

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Municipal Market Update

Prices on municipals were steady across the curve on Monday and Tuesday. They strengthened across the curve on Wednesday and Thursday. On Friday they were mixed, as the front-end was steady, while bonds maturing 10 years and longer strengthened.

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SBA Market Update

SBA activity languished along with the balance of the bond market last week. While fixed-rate products volumes may have suffered a bit from the lower available yields as debt markets rallied, floaters should seemingly have at least held pace, as much of the market expects a short-term rate increase in June.

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