Sector Update

November 6, 2017



The Treasury curve pivoted last week, with maturities beyond three yields declining and those inside that point rising. Double-digit declines only occurred for maturities beyond ten years, and the one-year maturity increased in yield by 4bp. The graph of yield changes across the curve clearly illustrates the pivot toward less slope.

Yields outcomes for US Agencies and investment-grade corporate debt resembled the Treasury market, although some of the stronger credits in the corporate sector did outperform Treasuries by a couple of basis points. Spreads between mortgage-related securities and Treasuries also mostly held steady. Municipal markets underperformed, with tax-free yield spreads widening by 3bp at the short end and by as much as 11bp for twenty and thirty year maturities.

Many portfolio managers remained on the sidelines for much of the week. The greatest interest seemed to develop late in the week in the mortgage sector, though at no time did markets seem truly busy. Surprisingly few bond switches and portfolio adjustments took place, especially given the yield increases of the prior few weeks and the historical tendency by many portfolio managers to conduct such trades in the early and middle portions of their fourth business quarter.

Friday’s five-year Treasury closing yield of 1.99% exceeded the daily closing average year-to-date by 12bp and exceeded by 13bp the average for the last year of trading. The ten-year Treasury finished Friday at 2.33%, 2bp above the year to date average and 1bp below the average for the last year.

 

 





Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries were unchanged for the week, compared to a modest tightening for fixed-rate MBS, amidst a rally in prices for the broader bond market.

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Agency Market Update

Agency yields were pressed down along the long-end of the curve last week as investors turned their attention to news out of Washington. Two-year Agency yields increased 2 bps to 1.68%, 5-year Agency yields fell 4 bps to 2.05%, and yields on 10-year Agencies were lower by 9 bps to 2.67%.

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Fixed Rate Mortgage Market Update

Mortgage rates and Treasury yields five years and longer fell last week with unchanged to slightly tighter mortgage yield spreads versus Treasuries. Mortgage rates fell last week after rising the previous two weeks. Mortgage applications for the week ended October 27 fell 2.6% to the lowest level since February.

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Municipal Market Update

Municipal bond funds reported investors pulled cash out, as weekly reporting funds experienced outflows of $654.999MM in the latest reporting week, after experiencing inflows of $262.006MM the week prior. The four-week moving average remained positive at $46.685MM, after being in the green at $175.351MM the week prior.

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SBA Market Update

Activity in the SBA sector was limited last week, as portfolio managers reviewed current holdings of SBA floating–rate pools.  In October, the SBA announced a change to the Secondary Market Program relative to the timing of the pass through of amortization excess.

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