Sector Update

September 18, 2017

Yield increases across almost every term of every investment grade sector last week reversed the more gradual declines that occurred during the prior three weeks. A 15bp surge in ten year Treasury yields retuned that maturity to levels not seen since mid-August. Yields moved up 10bp or more for Treasury terms from two through twenty years. The consistency of yield increases for the various terms translated to an almost parallel upward yield curve shift for the two year and beyond portion of the curve, with the less than two year portion of the curve steepening sharply.

Last week’s bond market selloff occurred in conjunction with rallies in the major equity markets and a general risk-off market sentiment. Relaxation from anxieties about North Korea and some quantification of the magnitude of the impacts of the two major US hurricanes seemed to outweigh economic indicators in terms of market impact, though the inflation related reports did come in slightly stronger than expected. The relatively small spread impacts from the risk-off sentiment last week reflects the already tight levels between many sectors and Treasuries and the modest amount of widening occurring during the prior weeks’ largely risk-off trading sentiment. While yield spreads versus Treasuries tightened almost universally for all sectors, in most cases the amounts were small.

Many portfolio managers shifted their emphasis last week, focusing much more on putting cash to work than on selling or restructuring. Depositories displayed this tendency most strongly, resulting in a prominent change in the type of transactions executed. While this shift toward outright buying does reflect some prior accumulation of cash and opportunistic seizing of the suddenly higher yields, the large volume of bid requests and sometimes lengthy lists of sales candidates from the prior couple of weeks also serves as a barometer of portfolio manager needs and sentiment. Many portfolios differ from targets in terms of duration, convexity, and other parameters. It will be interesting to see if the improved yield levels favor more of this activity assuming these yield levels hold.

On Friday, the five-year Treasury closed at 1.80%, 5bp below the daily closing average year-to-date and 4bp above the average for the last year of trading. The ten-year Treasury finished at 2.20%, 11bp below the year-to-date average for the daily closing yield and 2bp beneath the average daily close for the last year.


Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries tightened 1 to 2 bps as the broader bond market experienced a sell-off. For the week, the 5-year Treasury increased 17 bps from 1.64% to 1.81%, the largest weekly increase since early March, and a fairly substantial move for a market plagued by low levels of implied volatility.

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Agency Market Update

Agency yields benefited from the 5-, 10-, and 30-year year Treasury rates drifting higher last week with “risk on” sentiment abound. The “risk off” attitude subsided with the downsizing of economic costs related to Hurricane Irma’s destruction and the lack of news out of North Korea.

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Fixed Rate Mortgage Market Update

Mortgage rates and Treasury yields rose last week; however, MBS did not sell off nearly as much as the Treasury market, resulting in a tightening of mortgage yield spreads. Mortgage applications rose to the highest level since the election increasing 9.9%. No housing reports were released last week.

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Municipal Market Update

Municipal bond funds posted inflows for the tenth week, as weekly reporting funds experienced $241.383MM of inflows in the latest reporting week, after experiencing inflows of $250.368MM the week prior. The four-week moving average was positive at $396.692MM, after being in the green at $483.038MM the week prior.

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SBA Market Update

Portfolio managers continued extending duration last week by adding DCPCs from the September auction and certificates from the semi-annual SBIC issuance. In addition, investors continued to add floating-rate SBAs to their portfolios last week with the majority of activity focused on equipment-backed pools.

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