Sector Update

October 15, 2018

Volatility in equities made the bulk of the headlines last week.  The Treasury market responded with risk-off sentiment moving the curve lower and flatter, with 2-year Treasury yields declining by 3 basis points and 5- and 10-year yields falling by 6-7 basis points. While yields declined across most terms and sectors of the investment grade market last week, the modest size of the movements left most of the large yield increases occurring the week prior intact.

Investment grade spreads widened across most sectors compared to the previous week.  The biggest movement in spreads occurred in the Agency and municipal sectors, both of which cheapened versus Treasuries.  Corporate debt also underperformed slightly, with most names moving to wider spreads.  Mortgage-related debt moved mostly in line with Treasuries.

Given the heightened volatility many portfolio managers stayed out of the market, but with the significant selloff the previous week investors were still able to lock in yields near the most recent high marks.  The majority of activity occurred in the US Agency and MBS sectors, with smaller increases in municipal activity.  Much of the maturing Agency debt had coupons at or below 1.15%, and investors can now reinvest at yields approximately 3 times higher.  Longer-maturity MBS are now trading at the widest spreads of the past 2 years.  The monthly DCPC auction was held last week and the new issue tightened slightly compared to the previous month, but is still trading at 7 basis points higher than the average over the past year.

Friday’s five-year Treasury closing yield of 3.02% exceeded the daily closing average so far this year by 30 basis points and by 43 basis points exceeded the average over the past year.  The ten-year Treasury finished at 3.16% Friday, 28 basis points above the year-to-date average and 39 basis points above the average for the past year.

Adjustable Rate Mortgage Market Update

Yield spreads between hybrid ARMs and Treasuries widened slightly last week, 1 bp or so on average, reflecting lower prices and underperformance.  ARM origination was limited as the focus remained on fixed-rate activity although origination should pick up towards the end of the week.  Given the large rate move this month, it will be interesting to see how the ARM sector trades this cycle.

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Agency Market Update

Last week Treasury yields declined across the curve, particularly on the longer end, with 2-year yields dipping 3 basis points and 10-year yields falling by 7 basis points.  The spread between the 2-year and 10-year Notes fell from its recent highs and ended the week at 30 basis points, 5 basis points lower than the previous week.  Agency bullets underperformed Treasuries.

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Fixed Rate Mortgage Market Update

Over the past two weeks yield spreads on current production coupons to Treasuries have sharply widened, as spreads have risen to the widest levels seen over the previous two years.  30-year current coupon spreads versus the Treasury curve are approximately 79bps currently, and have widened 9bps from the close on July 25th.

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Municipal Market Update

Prices on municipals were weaker across the curve to start the week on Tuesday. On Wednesday municipal prices were mixed, as the front-end was steady, while prices on bonds maturing 10 years and longer weakened. On Thursday they were mixed again, as the front-end was steady, while bonds maturing 10 years and longer reversed course and strengthened.

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SBA Market Update

SBA activity last week was slower than recent levels due to several factors.  The DCPC auction last Thursday, which included 20yr and 25yr terms, priced at tighter spreads than the prior month, but offer significantly higher debenture rates of 3.77% and 3.89%.  Investor activity is expected to also pick up in floating rate equipment pools as yields on SBA floating rate pools moved higher over the last month and are likely to move higher if the Fed raises rates later this year.

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CMO Market Update

Last week, we took a look at recent yield levels with the somewhat dramatic increase in benchmark yields. I wrote “it has been nearly a decade, ten-years, since portfolio managers have seen 3.50+ yields in intermediate term mortgage investments.” Investors are still focused on the shorter-end of the spectrum in CMOs but we do see them hanging on duration in other sectors, namely Munis and I want to show what’s available in CMOs as potential complements.

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