Sector Update

May 8, 2017

Narrow trading ranges and small yield increases characterized most of the bond market last week. Even in conjunction with the FOMC rate decision, the busy economic calendar failed to create much of anything in the way of market volatility: the five-year Treasury only covered an 8/32nd trading range for the entire week.  Small but consistent Treasury yield increases of 3bp to 7bp occurred across all Treasury maturities. Excluding the 25 year and beyond maturities, the increases were very consistent, ranging from 5bp to 7bp for all maturities from three months to twenty years.

The wait-and-see attitude prevalent at the beginning of the week eroded with each economic release and with the FOMC decision. The absence of market volatility allowed portfolio managers to focus on realignment with liquidity and duration targets and also to search for elusive pockets of value in a market characterized by limited supply in key sectors, especially for some of the more popular products with banks portfolio managers. Low issuance amounts in MBS markets and agency markets remain an important challenge for traders and for portfolio managers.

Mostly small changes in inter-sector yield spreads last week. Much of the changes that occurred were a symptom of low market volatility as agency callables and some mortgage-related securities closed in on Treasury and swap curve benchmarks by amounts in the 2bp to 4bprange. Municipal debt spreads also contracted, though these changes were driven more by supply considerations and by developments in changing views on the likely course of US tax policy than by implied volatility.

Five-year Treasuries finished last week at a yield of 1.88%, 3bp below their year-to-date daily closing average and 35bp above the average for the last year of trading. The 2.35% yield at which the ten-year Treasury ended Friday is 5bp below the year-to-date average and 33bp above the average daily close for the last year.



Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries remained stable last week. Demand for ARMs has improved in recent weeks primarily due to wider spreads relative to earlier in the year.

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Agency Market Update

Agency yields continued to improve last week, increasing 4 to 8 bps across the curve. Two-year Agency yields increased by 4 bps to 1.39%, 5-year Agency yields improved 8 bps to 1.99%, and yields on 10-year Agencies were higher by 8 bps to 2.73%.

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Fixed Rate Mortgage Market Update

Activity in MBS picked up during the course of last week as economic data and the market was able to move past the FOMC announcement and a very heavy economic calendar. Yield spreads in 15yr and 30yr fixed MBS tightened to both Treasuries and swaps last week.

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Municipal Market Update

Municipal bond funds recorded inflows for the week, as weekly reporting funds experienced $127.783MM in inflows in the latest reporting week, after experiencing inflows of $144.519MM the week prior. The four-week moving average remained positive at $547.560MM, after being a positive $443.814MM the week prior.

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SBA Market Update

Activity in the SBA sector cooled off a bit last week despite ongoing strong demand for floating-rate structures. Without an influx of new pools, supply became a limiting factor.

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