Sector Update

November 13, 2017

Yields moved broadly higher across bond market sectors last week, escalating 5bp to as much as 10bp for some investment products. The U.S. Treasury yield curve steepened slightly, as the yield spread between the three-year and the seven-year points increased 4bp. Yields for all maturities of U.S. Treasury debt seven years and beyond rose seven to nine basis points.

In many cases U.S. Treasury yield increases exceeded those occurring in other sectors, with tightening versus Treasury benchmarks especially pronounced in the municipal debt markets. Many terms and structures held nearly steady in yield or, in some cases, actually moved downward, resulting in over 10bp tighter spreads. While yield spreads versus Treasuries mostly finished the week tighter in the corporate sectors and for GSE debt, changes of only 1bp to 3bp were more in line with the norm. MBS yields moved slightly more than Treasuries, with spreads widening by 1bp to 3bp.

Activity picked up last week for most sectors. Some portfolio managers responded to higher yields, as in some cases yield objectives were reached, while in others the higher levels merely served as an inspiration. Bond switches also picked up, as the opportunity to book small losses recoverable in reasonable timeframes via increased yields exists for many portfolios.

Friday’s five-year Treasury closing yield of 2.05% exceeded the daily closing average year-to-date by 18bp and exceeded by 18bp the average for the last year of trading. The ten-year Treasury finished Friday at 2.40%, 8bp above the year to date average and 7bp below the average for the last year.



Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries remained stable for the second consecutive week, as the overall bond market traded in a narrow range that resulted in minimal increases to yields.

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Agency Market Update

Agency yields increased across the curve last week, moving in lock-step with the rise in Treasury yields.  With the stock market falling after last week’s unveiling of the Senate tax plan, the rise in Treasury yields is more a result of rising yields in the European market than any optimism surrounding tax reform.

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Fixed Rate Mortgage Market Update

Treasury yields rose last week with unchanged to slightly higher mortgage rates and wider mortgage yield spreads versus Treasuries. Mortgage rates were mixed last week and have traded in a tight range over the last month and for much of this year. The MBA Refi Index (1291) has fallen eight of the last nine weeks to the lowest level since February.

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Municipal Market Update

Municipal bond funds reported investors put cash into funds, as weekly reporting funds experienced inflows of $463.044MM in the latest reporting week, after experiencing outflows of $654.999MM the week prior. The four-week moving average was positive at $151.552MM, after being in the green at $46.685MM the week prior.

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SBA Market Update

Portfolio managers focused on adding fixed-rate SBAs, as the DCPC auction was well received by investors.  Activity in the floating-rate SBA sector was limited last week, as portfolio managers continued to review current holdings of SBA floating-rate pools. 

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