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.

Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries were 1- to 2 basis points tighter for the week. The spread between the 2-year and 10-year Treasury declined 7 basis points last week and is currently at 78 basis points, after peaking at 136 basis points in December 2016 following the election.

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Agency Market Update

The curve flattened on the week with yields on Agencies moving slightly higher on the short-end of the curve, and declining for maturities 5 years and longer. The flattening curve was the result of robust demand for the 30-year Treasury auction, as investors stayed skeptical about tax reform and inflation.

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Fixed Rate Mortgage Market Update

Mortgage rates and Treasury yields fell last week with unchanged to slightly tighter mortgage yield spreads even as the Fed is expected to begin the unwinding of their balance sheet this week. Mortgage applications fell for the fourth consecutive week, falling 2.1%. Mortgage rates fell last week, marking the first weekly decline in over a month.

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Municipal Market Update

Municipal bond funds reversed course and posted inflows for the week, as weekly reporting funds experienced $43.576MM of inflows of cash in the latest reporting week, after experiencing outflows of $140.336MM the week prior. The four-week moving average was positive at $2213.857MM, after being in the green at $263.309MM the week prior.

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SBA Market Update

Last week began with limited activity in the SBA sector only to finish the week strong, as portfolio managers picked up floating-rate SBAs and fixed-rate paper from the latest DCPC auction. Floating-rate additions were both seasoned equipment-backed pools and seasoned real-estate pools.

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