Sector Update

September 17, 2018

Last week the Treasury market continued to sell off, with yields for maturities from 2 to 5 years increasing by 8 basis points and 10-year Treasuries increasing by 6 basis points.  By the end of the week the 10-year had reached 3.00% for the first time since the beginning of August.  The spread between 2- and 10-year sovereign debt narrowed to 21 basis points, near the lows of the current rate cycle.  The driver of declining bond prices seemed to center around several mostly positive economic releases mixed with hawkish commentary from Fed governors.  With a relatively lighter week this week regarding economic reports, investors will be focused on the upcoming FOMC meeting next week.

Last week saw a general tightening of yield spreads across most sectors.  Corporate debt appears to have outperformed the most compared to other sectors as overall investment grade spreads finished the week tightest versus other products.  As can be seen in the table below, the only sector with spreads to Treasuries that were unchanged on the week were Agency bullets.  Agency bullets remain relatively tight and would still make viable sale candidates.  Given how spreads have moved over the past month, municipals on the longer end of the curve appear to offer the most relative value.

Last week activity was strong across most sectors, particularly in MBS, SBA and Agencies.  The auction for the new SBIC issue wrapped up last week and the bond priced at approximately +48 basis points to Treasuries with a coupon of 3.55%.  Demand for the new SBIC bond appears to be much greater than the previous issuance this past March, which is not surprising given the wider initial issuance spreads over Treasuries (+48 now versus +38 in March).  Last week Fannie Mae announced issuance of a new 5-year Benchmark note priced at +11 to Treasuries, and Agency bullets are now trading near 3.00%.  In the municipal sector extension swaps continue to be a popular trade, and if you missed it last week, please be sure to read the latest Strategic Insight detailing current opportunities in the sector.  The market was also active in taxable municipals last week, particularly in 4- to 6-year paper.  In mortgage-related product, activity mostly consisted of 15-year passthroughs across the coupon stack; the bulk of the activity was in 4.0% paper, but demand remains strong for lower-coupon discount product.

Friday’s five-year Treasury closing yield of 2.90% exceeded the daily closing average so far this year by 21 basis points and by 40 basis points over the average over the past year.  The ten-year Treasury finished at 3.00% Friday, 15 basis points above the year-to-date average and 29 basis points above the average for the past year.

Adjustable Rate Mortgage Market Update

We saw new issue ARM origination last week, focused in 7/1s and 10/1s.  Current coupon spreads have widened over the past month and over the course of the summer.  New issue pool sizes have decreased recently because of reduced ARM issuance.  However, larger pools remain available in slightly seasoned space, where spreads have also widened in sympathy with new issue. 

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Agency Market Update

The Treasury market sold off for a second consecutive week, particularly in the belly of the curve, with front- to intermediate-maturity Treasury yields increasing by approximately 8 basis points.  Agency bullet yields moved in line with Treasuries.  Yields for 2-year bullets are trading at 2.84%, 3-year bullet yields increased to 2.93%, and 5-year bullets now yield close to 3.00%.

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Fixed Rate Mortgage Market Update

Yields spreads for current production coupon MBS to Treasuries tightened a couple of basis points this past week, as the overall bond market trended higher in yield for the second consecutive week.  Valuations continue to remain near their highs for the year despite the modest tightening. The performance in recent weeks has occurred even as the 10-year Treasury has inched up to 3.00%.

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Municipal Market Update

Prices on municipals were steady across the curve on Monday. On Tuesday they weakened across the curve. On Wednesday they were mixed, as the front-end was steady, while bonds maturing 10 years and longer weakened. On Thursday they were mixed again, as the front-end weakened, while bonds maturing 10 years and longer were steady.

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SBA Market Update

SBA activity was focused on the semi-annual SBIC auction last Thursday, which priced at wider spreads than the previous auctions over the last two years.  Activity in the SBA sector improved last week compared to the last month including strong activity in a variety of product offerings in addition to strong investor demand resulting from the SBIC auction.

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CMO Market Update

This week we will focus on structure highlights so you can compare and contrast bonds similar to those we saw customer interest in last week.

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