Sector Update

September 11, 2017

Yields declined for almost all terms and sectors of the bond market last week. In the Treasury market yield declines of 9bp to 11bp occurred for all terms five years and longer. These declines and the curve flattening they caused reversed themselves almost completely in a rapid selloff this morning that returned rates to where they were Friday, September 1st, before Labor Day and last week’s trading.

Last week’s bond market rally was characterized by many as a risk-off phenomenon, with anxieties about Korea and hurricane impacts not quite strong enough to earn the flight-to-quality label. Unsurprisingly, yields in other bond market sectors lagged Treasury yields as they descended. The sentiment was more widespread than severe, with minor spread changes versus Treasuries occurring in most sectors. Even GSE debt spreads widened, a reflection of the widespread risk-off attitude. The sharpest widening of investment grade products occurred in the municipal sector, with an outer boundary of only about 6bp on the extent of the relative yield movements. This morning, Treasury yields climbed more than other sectors, returning spreads to levels in line with levels in place prior to last week’s trading.

Most relative value differences last week were minor and, based on this morning’s trading levels, temporary. Treasury yields moved by greater amounts than other sectors, widening credit and mortgage spreads alike during the course of the week. Most of this widening appears to have reversed this morning.

Bid-wanted requests increased last week, peaking Wednesday and Thursday. Most of the bid requests occurred in conjunction with buying, as some investors sought to realign portfolio durations with objectives. Swaps and restructuring seemed to motivate more of the activity than profit-taking. Some investors also sought to redeploy cash from recent heavy redemptions, and the widening of spreads cushioned the negative yield impact of the Treasury rally in many cases.

On Friday, the five-year Treasury closed at 1.63%, 22bp below the daily closing average year-to-date and 12bp below the average for the last year of trading. The ten-year Treasury finished at 2.05%, 28bp below the year-to-date average for the daily closing yield and 17bp beneath the average daily close for the last year.


Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries widened 5 bps as the overall bond market experienced a rally in price due to geopolitical events and dovish commentary from several Fed speakers.

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Agency Market Update

A flight to quality sent Agency yields lower across the curve, with the most movement occurring in longer-term maturities. The “risk off” attitude last week was driven by news from North Korea, U.S. debt ceiling discussions, a possible government shutdown, and Hurricane Irma.

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Fixed Rate Mortgage Market Update

Mortgage rates fell last week as longer Treasury yields have fallen recently to their pre-election levels. The 30-year mortgage rate fell to 3.67% last week, the lowest since November 2016. Trading activity across the MBS sector was on the slow side, while the CMO sector was active last week.

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Municipal Market Update

Municipal bond funds posted inflows for the seventh week, as weekly reporting funds experienced $250.368MM of inflows in the latest reporting week, after experiencing inflows of $344.518MM the week prior. The four-week moving average was positive at $483.038MM, after being in the green at $578.250MM the week prior.

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SBA Market Update

Portfolio managers looked to add yield as they extended duration by adding DCPCs from the September auction. In addition, investors continued to add floating-rate SBAs to their portfolios last week with the majority of activity focused on seasoned equipment-backed pools.

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