Sector Update

October 29, 2018

Continued volatility in equities and elevated risk-off sentiment sent investors seeking sovereign debt and Treasury prices increased in response.  Treasury yields declined across the curve, particularly for maturities 2 years and longer, and the yield curve ended the week slightly flatter.  The 10-year ended the week at 3.08%, the lowest level since the beginning of October and 17 basis points below the high mark of the month at 3.25%.

Investment grade spreads widened across most sectors compared to the previous week.  The most significant movement in spreads occurred callable Agencies, municipals, and corporates, all of which cheapened versus Treasuries.  Mortgage-related debt also underperformed Treasuries but to a lesser degree.

Despite the heightened volatility many portfolio managers were active in the market last week.  Activity was spread across a multitude of sectors, both taxable and non-taxable.  Bank investors were particularly active in corporates, fixed MBS, and bank-qualified municipals.  Floating rate SBA paper, particularly with par-type dollar prices, was another popular trade.  Fifteen-year MBS are now trading at the widest spreads in more than a year, and 7/1 hybrid ARMs also look attractive versus similar product.

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

Last week, we saw activity focused in pre-reset 7/1 hybrid ARMs.  This sector has been hampered by an increase in at-reset speeds, which has caused valuations on pre-reset 7/1s to cheapen by approximately 1.5 points this year. These speeds will likely continue because the 2012-2013 vintages that will be resetting in the next few years are facing an even higher rate shock compared to the 2011 borrowers.

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Agency Market Update

Heightened volatility in equities last week led to a Treasury market rally and a somewhat flatter yield curve.  Agencies largely underperformed sovereign debt.  Agency bullets with maturities between 2 and 5 years fell by 3 to 7 basis points.

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Fixed Rate Mortgage Market Update

Yield spreads on current production coupons to Treasuries have widened significantly during the month of October. 30-year current coupon spreads versus the Treasury curve are approximately 85bps currently, and have widened 9bps since the end of September.  15-year MBS have experienced even more widening with yield spreads expanding 14bps over the same time period.

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Municipal Market Update

Prices on municipals started the week mixed, as bonds maturing ten years and in were steady, while the long-end strengthened. On Tuesday they strengthened across the curve. On Wednesday prices were mixed again, as bonds maturing ten years and in were steady, while the long-end strengthened.

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SBA Market Update

Investors were active last week in floating-rate SBA pools as yields on these pools should move higher if the Fed raises rates later this year.  The market is currently pricing in around a 75% chance of another 25bps hike by the Fed at their meeting in December, which should continue to drive demand in floating-rate SBAs.

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CMO Market Update

Treasury yields have backed off recent highs declining week-over-week by 10bps+ between 2 and 10 year tenors. A couple weeks ago I commented that it had been nearly a decade since portfolio managers have seen 3.50+ yields in intermediate term mortgage investments.

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