Sector Update

October 30, 2017

Last week bond markets seemed to adjust to the higher yields delivered by a Treasury market selloff the week prior. While most bond yields only increased by small amounts between Monday and Friday, they remained elevated to levels not seen since March for many security types in many sectors, nearly unanimously for paper with durations of seven years or less.

While yield spreads in some sectors tightened versus Treasuries slightly last week, overall yield levels in the various sectors held up surprisingly well during the major selloff since mid-September. Municipal markets outperformed all other sectors last week, tightening by over 3bp for some terms and structures. While some widening of spreads versus Treasury benchmarks occurred in the corporate sector, amounts were small for investment grade offerings, especially those with the highest credit quality. The pronounced similarity of yield outcomes between sectors distinguishes the recent selloff from what is typically observed.

While some portfolio managers more aggressively pushed cash into the market last week, any resulting increase in trading volume seemed to be offset by a slowdown in bond switches and portfolio adjustments. While lower bid prices might have been partially to blame, in many cases analysis begun at the beginning of this young business quarter might still be too incomplete to begin transacting bond trades in response.

Friday’s five-year Treasury closing yield of 2.03% exceeded the daily closing average year-to-date by 17bp and exceeded by 19bp the average for the last year of trading. The ten-year Treasury finished Friday at 2.41%, 9bp above the year to date average and 10bp 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 week. Most sectors have experienced some level of spread tightening since early September in connection with the backup in interest rates.

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Agency Market Update

Agency yields rose for all maturities last week, led by the 10-year maturity range. The jump in rates more than offset the pullback from two weeks ago, and marked the sixth week in the last seven that yields rose.

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Fixed Rate Mortgage Market Update

Mortgage rates and Treasury yields rose last week with unchanged to slightly wider mortgage yield spreads versus Treasuries. Mortgage rates rose last week for the third time in the last four. Mortgage applications for the week ended October 20 fell 4.6%, driven lower by a decline in both purchase (-6.1%) and refinancing activity (-3.0%).

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Municipal Market Update

Municipal bond funds posted inflows for the week, as weekly reporting funds experienced $262.006MM of inflows in the latest reporting week, after experiencing inflows of $536.158MM the week prior. The four-week moving average was positive at $175.351MM, after being in the green at $204.402MM the week prior.

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SBA Market Update

Activity in the SBA sector started out the week with limited trading, only to increase later in the week as new issue floating-rate SBAs came to market.  In addition, seasoned fixed-rate paper also traded well ahead of the DCPC auction later next week.  Since our last update, the SBA has announced a change to the Secondary Market Program relative to the timing of the pass through of amortization excess.

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