Sector Update

October 1, 2018

The US Treasury market wobbled around within a small trading range last week. No point on the Treasury curve finished the week more than 3bp from the starting yield of the previous Friday. The minor movements managed to slightly further the trend toward a flatter curve, with a 2bp yield increase at the one year point and a 2bp decline at the 10yr point. The FOMC actions followed expectations closely and a relatively light economic calendar produced no real surprises leaving markets to focus on what seemed to be a ratcheting back of negative trade rhetoric and moderation of other international tensions.

The balance of the investment grade sector excluding Treasuries also moved by small amounts last week. Only subtle relative changes occurred between investment grade sectors. Slight outperformance by corporate and municipal debt left a few names tighter versus Treasury benchmarks although many names finished at unchanged spreads. Meanwhile, mortgage related securities and callable debt leaned ever so slightly toward the cheaper side, with a few structures and terms finishing a basis point or two wider while most finished where they started.

Even though activity last week could hardly be characterized as heavy, much more occurred than the very small yield and spread movement might suggest. Subsequent to the FOMC announcement, some portfolio managers executed trades with greater confidence. Many purchased the belly of the curve producing a modest pickup in demand for seasoned 15yr MBS and other alternatives in the five year duration range. Floaters also saw renewed interest, as another 25bp short term rate increase by the Fed and an increase in the probability assigned to further increases pushed yield expectations for floaters higher with SBA 7(a) pools in particular undergoing renewed interest by portfolio managers.

Friday’s five-year Treasury closing yield of 2.95% exceeded the daily closing average so far this year by 25 basis points and by 41 basis points exceeded the average over the past year.  The ten-year Treasury finished at 3.06% Friday, 20 basis points above the year-to-date average and 32 basis points above the average for the past year.


Adjustable Rate Mortgage Market Update

It was a relatively quiet end to the quarter in ARMs.  Last week, we saw more Ginnie Mae II ARM origination, focused in 5/1 hybrids.  Gross issuance of adjustable MBS for the month came in at 1 billion, which was an approximate 300 million decline month over month.

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Agency Market Update

After several weeks of rising Treasury yields, the curve ended last week little changed from the week before.  The 2-year Note yield ticked higher by a basis point and the 5- and 10-year Notes fell by a basis point.  Agency bullets in the belly of the curve tightened in slightly.  Yields for 2-year bullets are trading at 2.85%, 3-year bullet yields fell by 2 basis points to 2.93%, and 5-year bullets now yield 3.02%.

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Fixed Rate Mortgage Market Update

Yield spreads for current production coupons to Treasuries were mostly unchanged for 15-year MBS and 1bp tighter on 30-year MBS.  Benchmark yields were largely stable, after marching higher for most of the month.  Implied volatility declined to levels not seen since 2007, which was supportive of the MBS performance over the past week.

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Municipal Market Update

Prices on municipals weakened Monday and Tuesday. On Wednesday they were mixed, as the front-end weakened, while bonds maturing 10 years and longer were steady. On Thursday they were mixed, as the front-end was steady, while bonds maturing 10 years and longer strengthened. Friday was a repeat of Thursday’s price action for municipals.

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SBA Market Update

As expected the Federal Reserve raised the Fed Funds Target Rate 25bps last week and additional rate hikes are projected, which should continue to drive demand in floating-rate SBAs.  The fed funds futures market is currently pricing in a 77% chance of a 25bps hike by the Fed on December 19th and 12 of 16 Fed members are projecting another hike this year.

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CMO Market Update

This week we will focus on the September Trade Summary where we look at what our Customers invested in last month. New for this month, I’ve added more history to provide perspective. Investors in September were able to pick up nearly 22bps of yield given a similar risk profile as August.

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