Sector Update

October 2, 2017



The bond market progressed toward higher yields last week for the third time in a row. As was the case for the week prior, yield increases occurred across almost all bond market sectors and terms, and the constancy of these yield increases across terms and sectors seemed more impressive than the size of the increases. While Treasuries maturing anywhere from two to thirty years rose 4bp to 8bp, only very isolated double digit yield increases occurred throughout all investment grade products. The cumulative impact of the last three consecutive weekly yield increases adds up to more impressive impacts, pushing ten-year Treasuries 27bp higher and five-year Treasuries 31bp upward. Using the commonly cited 2yr/10yr Treasury yield spread, curve slope only increased 6bp during this three week sell-off as the very short end of the cure absorbed most of the impact.

While yield increasers occurred across almost all market sectors, most other products moved by smaller amounts. Small amounts of spread tightening versus Treasury benchmarks occurred in fairly consistent pattern last week, with 1bp to 2bp of tightening common for Agencies and high quality corporate debt and perhaps twice as much, 3bp to 5bp, occurring in mortgage-related security markets and lower investment grade corporates. Municipal debt spreads versus Treasuries were mixed.

While portfolio managers continued to buy at an elevated pace relative to typical levels during recent months, there were times last week when their pace waned relative to the week prior.  Many investors continued to take advantage of the best yield levels for most investment grade products since July. Redeployment of funds accumulated during the heavy bond market redemptions of recent months continued, as higher yields continued to provide inspiration for previously delayed purchases. As this ready cash was deployed, many portfolio managers focused on the more difficult task of tuning overall portfolios to align them with long-term goals. It will be interesting to see if the beginning of a new business quarter accelerates the pace of such activity.

Friday’s five-year Treasury closing yield of 1.94% exceeded the daily closing average year-to-date by 8bp and exceeded by 15bp the average for the last year of trading. The ten-year Treasury finished Friday at 2.33%, 2bp above the year to date average and 7bp above the average for the last year.

 

 






 


Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries were unchanged for the second consecutive week, despite a broader bond market sell-off that resulted in tightening spreads across several sectors, including fixed-rate MBS.

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Agency Market Update

Agency yields benefited from the steepening Treasury yield curve as Janet Yellen cautioned the Fed “should be wary of moving too gradually” in a speech last week and the U.S. Administration released details for tax reform. Both events firmed expectations for a rate hike in December and prompted a hawkish market response.

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Fixed Rate Mortgage Market Update

Mortgage rates and Treasury yields rose again last week with a continuation of slightly tighter mortgage yield spreads even as the Fed announced plans to begin the unwinding of their balance sheet in October. Mortgage applications for the week ending September 22 fell 0.5% on a 2.8% increase in purchase apps and a 3.5% drop in refi apps.

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Municipal Market Update

Municipal bond funds posted inflows for the 12th week in a row, as weekly reporting funds experienced $378.211MM of inflows in the latest reporting week, after experiencing inflows of $573.978MM the week prior. The four-week moving average was positive at $360.985MM, after being in the green at $352.562MM the week prior.

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SBA Market Update

Portfolio managers continued adding both floating-rate and fixed-rate SBAs to their portfolios last week. Floating-rate additions were mostly new issue equipment-backed pools, although seasoned real-estate pools were also in the mix.

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