Sector Update

October 10, 2017

Very small yield increases occurred across most bond market terms and sectors last week. The Treasury curve demonstrates this consistency nicely, with yields for all terms rising 2bp to 3bp last week. Very seldom does a week of trading leave curve shape so perfectly intact. Thanks to four weeks of escalating yields, ten-year Treasuries now trade at yields last seen in July. And while volatility remains low by historical perspectives prior to 2017, the last month of trading activity did produce both the highest and lowest yields since early July for Treasury terms longer than two years.

While not quite as consistent as the 2bp to 3bp increases across the entire Treasury curve, other bond markets sectors moved in close fashion last week. High-grade corporate yields moved 1bp or so higher, compressing spreads versus Treasuries 1bp to 2bp. Mortgage spreads were mixed, with well-structured CMOs slightly outperforming MBS: they tightened slightly, while MBS actually widened 1bp to 2bp. Tax-free municipal yield increases for terms beyond five years exceeded similar-term Treasuries by 2bp to 5bp.

Many portfolio managers reacted to more favorable yield levels last week, driving some of the busiest activity of late. Intermediate terms in the agency sector and mortgage sector attracted the greatest interest, as highlighted in the commentaries relative to those sectors.

Friday’s five-year Treasury closing yield of 1.96% exceeded the daily closing average year-to-date by 10bp and exceeded by 15bp the average for the last year of trading. The ten-year Treasury finished Friday at 2.36%, 5bp above the year to date average and 8bp above the average for the last year.


Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries were 2 to 3 basis points tighter for the week, which was similar to the moves in several sectors. However, ARMs have generally lagged the recent tightening experienced in MBS market. This makes ARMs standout from a relative value standpoint compared to fixed-rate MBS.

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Agency Market Update

For the fourth consecutive week, Agency yields rose again, albeit modestly, moving in lock-step with the increase in Treasury yields. The move higher was driven by hawkish comments from several Federal Reserve members and the September employment report that showed stronger wage growth.

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Fixed Rate Mortgage Market Update

The mortgage market continues to trade in a tight range with minimal changes in yields or yield spreads last week. Mortgage rates increased for the fourth consecutive week. 15- and 30-year fixed mortgage rates have increased 17 and 19bps over the last month. Mortgage applications fell for the third consecutive week, falling 0.4%.

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Municipal Market Update

Municipal bond funds posted outflows for the week, as weekly reporting funds experienced $140.336MM of cash withdrawals in the latest reporting week, after experiencing inflows of $378.211MM the week prior. The four-week moving average was positive at $263.309MM, after being in the green at $360.985MM the week prior.

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SBA Market Update

The trend of the previous weeks continue, as portfolio managers add seasoned floating-rate SBAs and new fixed-rate paper. Floating-rate additions were both seasoned equipment-backed pools and seasoned real-estate pools. As the supply of the semi-annual SBIC issuance disappeared, investors looked to pick-up DCPC paper from the October auction for their fixed-rate SBA needs.

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