Sector Update

November 5, 2018

Markets shifted back to exhibiting more risk-on behavior after recent elevated equity market volatility. Treasury yields increased across the curve, with yields for 2- to 10-year terms increasing by 10 to 14 basis points, and sovereign debt is trading near the top end of recent trading ranges. The 10-year ended the week at 3.21%, close to the recent high mark of 3.25%. Steepening in the yield curve increased the spread between 2s and 10s to 30 basis points to end the week.

Investment grade spreads mostly tightened across various sectors compared to the previous week. The most significant spread movement occurred in callable Agencies and corporates tightening versus Treasuries. Alternatively, mortgage-related debt largely cheapened up, particularly in the 5-year area of the curve.

Many portfolio managers remained active in the market last week. Bank investors were particularly active in fixed MBS, bank-qualified municipals, and CDs. Bank-qualified municipal spreads were unchanged on the week. Par handle floating rate SBAs continue to be a popular option for investors seeking uncapped, lower duration instruments, and the new DCPC auction will be later this week for those seeking fixed rate product. Spreads for hybrid ARMs widened out on the week and are now trading at close to the year-to-date highs for most initial lockout terms.

Friday’s 5-year Treasury closing yield of 3.03% was 39 basis points above the average over the past year, and 30 basis points above the 2018 average. The 10-year Treasury finished at 3.21% Friday, 31 basis points above the year-to-date average and 39 basis points above the average for the past year.

Adjustable Rate Mortgage Market Update

Last week, buying picked up slightly in ARMs into the move to higher yields, although the volatile macro environment has caused some investors to take a pause in the sector. As it stands, ARMs are attractively priced at YTD wides in spread and close to YTD lows in dollar price.

Agency Market Update

The Treasury market sold off last week and the yield curve steepened out a bit. Agency debt mostly tightened in versus Treasuries, reversing the widening trend from the previous week. Agency bullets with maturities between 2 and 5 years saw yields increase by 9 to 11 basis points.

Fixed Rate Mortgage Market Update

There was a considerable increase in fixed-rate MBS activity last week. Investors seemed eager to take advantage of lower dollar prices and wider yield spreads. Yield spreads on 15-year current production coupons to Treasuries widened 4bps, while 30-year current coupon spreads widened 2bps. Spreads on 15-year MBS have doubled during 2018 and are now at a 21-month high.

Municipal Market Update

Prices on municipals started the week steady and then weakened daily for the rest of the week. Issuance for the week is projected to be $3.3B, which is below last week’s $5.2B in issuance, according to revised data from Thomson Reuters. Despite this decrease in weekly issuance, we expect that new issue offerings together with bid lists, should provide market participants with opportunities to fill needs this week.

SBA Market Update

SBA activity is expected to be focused on the DCPC auction later this week, which includes 10yr, 20yr and 25yr terms. Investors were also active last week in floating-rate SBA pools as yields on these pools should move higher if the Fed raises rates later this year.

CMO Market Update

This week we will focus on the October Trade Summary where we look at what our Customers invested in last month. For three months running now, fixed-rate CMOs were almost exclusively what we saw investor interest in. After backing off a bit, treasury yields are back within 3-5bps of year-to-date highs (all of which occurred in October).