Sector Update

October 9, 2018

The investment grade markets finally broke out of the doldrums last week as meaningful yield increases occurred across almost all terms and sectors. US Treasury yield changes resulted in some reversal of recent curve flattening, All terms five years and beyond pushed higher by 10bp or more, with thirty year Treasury yields leading the way by rising 16bp. Meanwhile, the one and two year terms on the Treasury curve rose 4bp and 7bp respectively.

Relationships between investment grade sectors remained surprisingly consistent last week given the size of the upward movement. The mortgage sector only underperformed slightly, with 2bp to 3bp wider spreads expressing prepayment adjustments due to slow September speeds reported last week combined with curve steepening. Corporate debt outperformed slightly, with more names moving to tighter spreads than wider spreads. Municipal debt lagged the rest of the market as yields increased by smaller amounts, with some terms and structures tightening by 10bp or more versus Treasuries.

While many portfolio managers took the opportunities last week to the market, the proportional increase in activity didn’t seem to reflect the size of the market move.  More noticeable pickups in activity occurred in the US agency and CMO sectors, with smaller increases in MBS and municipal activity. Timing may have suppressed activity with last week being the first of the business quarter and also with the selloff occurring in the latter half of the week. Customer inquiries shifted toward cash purchases as opposed to repositioning and restructuring of portfolios.

Friday’s five-year Treasury closing yield of 3.07% exceeded the daily closing average so far this year by 36 basis points and by 49 basis points exceeded the average over the past year.  The ten-year Treasury finished at 3.23% Friday, 40 basis points above the year-to-date average and 47 basis points above the average for the past year.

Adjustable Rate Mortgage Market Update

ARM prepayments were released last week, and the sector’s spreads dropped by 19%, in line with the move in fixed rates as day count and seasonal effects moved lower in September.  5/1 hybrid ARMs with 120+ WALA paid ~ 24 CPR, down 5 from last month and only 2 CPR slower than last September, when weighted-average coupons (WACs) were ~70bps lower.  An even more pronounced slowdown occurred in 5/1 hybrid ARMs at their first reset, which have paid faster recently.

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Agency Market Update

Treasury yields spiked last week, particularly on the long end of the curve, and the selloff pushed the yield curve to its steepest level since late June.  The yield on the 2-year Note finished the week 7 basis points higher, the 5-year yield increased 12 basis points, and the 10-year added 17 basis points.

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Fixed Rate Mortgage Market Update

The sell-off in the bond market caused yield spreads between current production coupon and Treasuries to widen 5bps for 15-year MBS and 8bps on 30-year MBS.  The improvement in the steepness of the yield curve helped 15-year MBS modestly outperform 30-year MBS.  Yield spreads on 15-year MBS are now at the top end of their YTD range, while spreads on 30-year MBS have set YTD highs.

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Municipal Market Update

Prices on municipals were mixed on Monday, as the front- and long-ends saw prices weaken, while intermediate maturities were steady. On Tuesday they were mixed again, as the front-end strengthened, while bonds maturing 10 years and longer were steady. On Wednesday they weakened, as strong economic news drove yields higher across the curve.

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SBA Market Update

SBA activity is expected to be focused on the DCPC auction later this week, which includes 20yr and 25yr terms.  Investors have also remained active in floating rate equipment pools offered at par and premium pricing as yields on SBA floating rate pools moved higher over the last month and are likely to move higher if the Fed raises rates later this year.

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CMO Market Update

A couple of interesting things are on the docket this week. First, with the recent and somewhat dramatic increase in benchmark yields, I have some structure highlights along with a comparable treasury and MBS to help give you a feel for where the market is at right now. Secondly, since last week was month/quarter end, the September Trade Summary is below for those wrapped up with other commitments last week.

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