Sector Update

October 16, 2017

Partially reversing four weeks of increasing yields, the Treasury market with terms longer than two years moved lower, with the long end moving the most: 8-10bp. Terms longer than fifteen years moved back to where they were trading one month ago. However, the short end held on to some of its gains, pushing the Treasury curve even flatter; the 2/10yr ended the week at around 77bp, visiting lows last observed July 2016.

Some bond market sectors followed Treasuries, while others held on to their trading range. MBS and corporate yields moved in lockstep with Treasuries, as their yield spreads versus Treasuries remained unchanged. Municipal and agency spreads versus Treasuries, both bullets and callable structures, did not keep up with the Treasury rally, resulting in slightly wider spreads compared to the prior week.

In a reversal of the previous week, trading activity was light, as the Columbus Day holiday and the rally seemingly hindered trading activity across the board. While there were a handful of moments of activity, few portfolio managers chose to enter the market and instead reassumed a wait-and-see attitude so common for the past year of trading.

Friday’s five-year Treasury closing yield of 1.90% exceeded the daily closing average year-to-date by 4bp and exceeded by 9bp the average for the last year of trading. The ten-year Treasury finished Friday at 2.27%, 4bp below the year-to-date average and 1bp above the average for the last year.