Sector Update

May 7, 2018



A second consecutive very quiet week for investment-grade markets left yields slightly lower for longer maturities, and slightly higher on the short end. With so little slope left to give, even the few basis points of twisting and flattening last week takes on significance as a flat curve becomes more likely and, arguably, imminent. While no Treasury term finished last week more than 4bp from the starting point, what is now a 45bp slope between the two-year and ten-year Treasury could erode to zero even with relatively quiet bond markets.

Outcomes for the various investment grades sectors only varied by small amounts last week.  A couple of weeks of quiet took a very minor toll on callable structures and cuspy mortgage products, as less volatility caused barely perceptible trends toward tighter yield spreads. With a more typical amount of yield and price changes, such small weekly relative value changes might escape notice. However, in a week in which even the municipal sector mostly behaved consistently with Treasuries, even a small spread move versus benchmarks invites scrutiny and begs for what is probably an unnecessary explanation.

Lack of motion often results in slow trading volumes and the first part of last week seemed to demonstrate this. Later in the week many portfolio managers busied themselves adjusting bond portfolios and redeploying cash, resulting in activity that, while not brisk, exceeded what the small yield movements might suggest. No specific theme seemed to drive the activity, as investors sought a variety of terms in several sectors.

Friday’s five-year Treasury closing yield of 2.79% exceeded the daily closing average so far this year by 21bp and was 65bp higher than the average since one year ago. The ten-year Treasury finished at 2.95% Friday, 17bp higher than the year-to-date average and 49bp above the average for the last year.

 






Adjustable Rate Mortgage Market Update

Yield spreads between hybrid ARMs and Treasuries were unchanged last week, as the overall bond market traded in a relatively narrow range.  Seasoned bond selling in the secondary market continued last week, with most of this activity consisting of post-reset 5/1s.  Yields on post-resets have increased sharply this year as a result of 12-month LIBOR increasing from just 1.69% in early September 2017 to 2.77%.

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Agency Market Update

Agency yields were mixed on the week, with modest increases on shorter-term maturities and small declines for longer-term maturities, resulting in a slightly flatter curve.  For the week, two-year Agency yields moved higher by 2 bp to 2.55%, the 5-year Agency yield declined 2 bps to 2.86%, and yields on 10-year Agencies fell 2 bps to 3.24%.

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Fixed Rate Mortgage Market Update

MBS and CMO yield spreads versus Treasuries were stable last week. Mortgage rates were unchanged after rising each week during the month of April to the highest levels in over four years.  Mortgage applications fell 2.5% for the week ended April 27 driven lower by a 3.5% drop in refinance activity.

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Municipal Market Update

Prices on municipal bonds were mixed daily through Thursday. On Monday the front-end was steady, while bonds maturing 10 years and longer strengthened. On Tuesday prices on bonds maturing 10 years and in weakened, while the long-end was steady. On Wednesday the front-end was steady, while bonds maturing 10 years and longer strengthened.

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SBA Market Update

Activity in the SBA sector increased slightly last week from the prior, very slow week. Fixed-rate SBA volumes remained slow, with minimal yield curve movement and no monthly auctions to stir much investor interest. Activity improved slightly for 7(a) pools, as most investors’ outlooks for short-term rates favor floating-rate products.

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