Sector Update

November 27, 2017



The Treasury curve pivot continued last week, with the very small changes in yields further flattening the curve from both ends. The 2yr/10yr yield spread shrank another 4bp, adding to the 12bp flattening occurring the prior week. So far this year this spread compressed 68bp. Even greater flattening of the Treasury curve occurred if the very short end is used: the yield spread between one- and two-year Treasuries tightened by 22bp since the beginning of 2017.

Other bond market sectors underwent small yield changes that contributed to similar flattening of the respective curves to what occurred in the Treasury sector. Consequently, very minor changes to relative value and inter-sector yield spreads occurred, with no notable movements in benchmark spreads.

Elevated activity from the week prior continued into Monday and Tuesday last week, fading to minimal volumes on Wednesday and Friday.  Portfolio restructuring via bond switching contributed to the volume, as many portfolio managers address needed adjustments relative to portfolio objectives, balance sheet changes, or modified interest rate outlooks.

Friday’s five-year Treasury closing yield of 2.06% exceeded the daily closing average year-to-date by 19bp and exceeded by 18bp the average for the last year of trading. The ten-year Treasury finished Friday at 2.34%, 2bp above the year-to-date average and 1bp above the average for the last year.

 





Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries remained stable for the week.  Activity in the ARM sector was resilient despite the holiday-shortened week. 

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Agency Market Update

The Agency yield curve continued its flattening the past week as investors turned their attention to the release of minutes from the latest FOMC meeting.  The minutes from the Fed’s Oct. 31-Nov 1 meeting revealed policymakers expect rates to be raised in the “near term,” due to a strengthening economy, though several stated their support for a hike would depend on whether or not they see evidence of higher inflation.

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Fixed Rate Mortgage Market Update

Mortgage sector yields continued to trade in a tight range during the holiday-shortened week. Mortgage yield spreads were mixed versus Treasuries and remain historically tight. The MBA Refi Index fell 4.8% to 1306, falling nine of the last eleven weeks.

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Municipal Market Update

Municipal bond funds reported investors put cash into funds for a third week, as weekly reporting funds experienced inflows of $659.237MM in the latest reporting week, after experiencing inflows of $417.719MM the week prior. The four-week moving average was positive at $221.250MM, after being in the green at $121.942MM the week prior.

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SBA Market Update

Activity was limited last week due to the Thanksgiving holiday.   Some investors picked up fixed-rate SBAs and par priced floating-rate SBAs early in the week.  Loan activity continues to be strong in both 7(a) floating-rate loans and fixed-rate USDA government guaranteed loans.

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