Sector Update

November 26, 2018

Treasury debt yields were little changed week-over-week, and the yield curve continued its recent flattening trend.  Yields declined modestly for terms of 3 years and longer, and the spread between 2-year and 10-year Notes finished the week approximately 3 basis points flatter at 23 basis points.  The curve has nearly returned to its flattest level of the year last seen in August.  In recent weeks the market appears to have backed off its expectations for future Fed rate hikes, and now appear to expect a pause in tightening following the December meeting.

Investment grade spreads were mixed compared to the previous week.  The most significant spread movement occurred in tax-free muncipals.  Municipal debt largely tightened in versus Treasuries after widening out the previous week.  Agency MBS cheapened up by 3 to 4 basis points for 15- and 30-year passthroughs and are at the cheapest levels of the past year.  Corporate debt also largely widened out, particularly in the energy sector.

With the holiday-shortened week investment activity was relatively light.  Some portfolio managers focused on selling front-end Agencies and longer step-ups.  Purchases of MBS mostly included faster-paying discount pools.  Purchases of CMOs mostly centered around vanilla sequentials with limited extension risk.  ARM spreads were largely unchanged on the week but, given the recent underperformance of Agency MBS, ARMs have widened out in the past month and are near the widest spreads of the past year.  Investors have mostly focused on seasoned 5/1 and 10/1 product.  See individual sector updates for additional details.

Friday’s 5-year Treasury closing yield of 2.87% was 18 basis points above the average over the past year and 12 basis points above the 2018 average.  The 10-year Treasury yield finished at 3.04% on Friday, 13 basis points above the year-to-date average and 18 basis points above the average for the past year.

Adjustable Rate Mortgage Market Update

Flows in ARMs were quiet last week.  The ARM origination cycle continued with new issue selling of 15.3M in Fannie Mae 7/1s and 10.1M in Ginnie Mae 5/1s.  ARM gross issuance remains at multi-year lows and supply is tracking close to last month, when we saw just under 1 billion in total gross issuance. 

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Agency Market Update

The Treasury curve continued its recent flattening trend during the holiday-shortened week.  Agency bullets mostly moved in line with Treasuries.  Agency bullets with 2-year maturities cheapened by 1 basis point and now yield 2.86%.  Bullets with 3-year maturities were unchanged at 2.92%, and 5-year maturity yields declined 1 basis point to 2.98%.

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Fixed Rate Mortgage Market Update

During the past trading week, yield spreads on current production coupons to Treasuries resumed their widening trend that has been in place for much of 2018.  The cheapening trend has elevated yield spreads back to levels last observed during 2013 for the 30-year sector and early 2017 for the 15-year sector.

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Municipal Market Update

Monday saw prices on municipals start the week mixed, as the front-end was steady, while bonds maturing 10 years and longer strengthened. On Tuesday prices strengthened across the curve. On Wednesday prices were steady across the curve. On Friday’s shortened trading session prices strengthened across the curve.

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SBA Market Update

Floating-rate SBA pools remain attractive to investors as yields on these pools should move higher if the Fed raises rates as expected later this year.  Prepayment speeds for SBA pools increased in November compared to the previous month.

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CMO Market Update

Last week was a relatively light week with the Thanksgiving holiday. Of note last week, we saw investor activity in Sequential full coupons and in cut coupon GNMA CMOs. Below are snapshots of what an investor could reasonably expect to see in CMO investments such as those.

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