Sector Update

September 24, 2018

Last week the Treasury market continued its recent sell off, particularly on the intermediate portion and longer end of the curve, with yields for 5-year Treasuries increasing by 4 basis points and 10-year Treasuries increasing by 7 basis points.  The steepening move left the spread between 2- and 10-year Notes at 26 basis points after narrowing to 21 basis points the previous week.  The upward move in yields appeared to be more the result of easing trade concerns than reaction to economic releases.  Investors will look to the FOMC meeting this Wednesday and, with the market fully expecting a 25 basis point rate hike, the main focus will be on evaluating the latest Summary of Economic Projections (the Fed’s “dot plot”).

Yield spreads across investment sectors were mixed last week.  Municipal debt on the longer end of the curve appears to have outperformed the most compared to other sectors as overall municipal spreads tightened versus alternative products, mostly due to a lighter issuance week combined with the strong bid for longer paper among institutional investors.  Over the past month Agency callable debt has been steadily tightening in over Treasuries and continued that trend last week.  Agency bullet spreads were unchanged.  Spreads for MBS were also largely unchanged, while CMO spreads generally widened.

Last week activity was intermittent across most sectors, which is somewhat surprising given the backup in rates over the past several weeks.  Agency bullets with 5-year maturities are now trading above 3.00%, and even given the tighter spreads for callables, absolute yields appear attractive.  In mortgage-related product, investors continue to see value in seasoned lower-coupon 15-year paper as well as seasoned 20-year 3.0% and 3.5% product.  Portfolio managers have also been active in high loan-to-value MBS as they tend to pay faster than similar generic MBS.  CMO investors continue to purchase higher coupon sequentials as well as VADMs with projected terms of approximately 5 years.

Friday’s 5-year Treasury closing yield of 2.95% exceeded the daily closing average so far this year by 26 basis points and by 43 basis points exceeded the average over the past year.  The ten-year Treasury finished at 3.06% Friday, 20 basis points above the year-to-date average and 33 basis points above the average for the past year.

Adjustable Rate Mortgage Market Update

We saw new issue ARM origination last week across a variety of bid lists, focused in 7/1s.  New issue spreads have lagged the performance of 15-year bonds over the past month despite the move to higher yields.  We saw larger seasoned pool selling in 3 – 5-year seasoned 5/1s and 7/1s.

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Agency Market Update

The Treasury market sold off last week and reversed the recent flattening trend, with the spread between 2-year and 10-year Treasuries ending the week with the widest margin of the past month at 26 basis points.  The 5-year Treasury reached the highest yield of this rate cycle at 2.95%, and the 10-year ended the week at 3.06%, the highest level since mid-May.  Agency bullet yields moved in line with Treasuries.  Yields for 2-year bullets are trading at 2.86%, 3-year bullet yields increased to 2.96%, and 5-year bullets now yield 3.03%.

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Fixed Rate Mortgage Market Update

Yields spreads for current production coupon MBS to Treasuries continued the trend and tightened a couple of basis points this past week, as the overall bond market trended higher in yield for the third consecutive week, while mortgage rates have increased for the last four weeks.  Valuations continue to remain near their highs for the year despite the modest tightening the last several weeks.

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Municipal Market Update

Prices on municipals weakened daily through Wednesday. On Thursday they were mixed, as the front-end weakened, while bonds maturing 10 years and longer were steady. On Friday prices on municipals were mostly steady across the curve. Issuance for the week is projected to be $3.13B, which is below last week’s $6.39B in issuance, according to revised data from Thomson Reuters.

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SBA Market Update

SBA activity last week continued in fixed rate SBIC and DCPCs, while investors may shift their focus to floating rate SBA pools this week given the Fed meeting mid-week and the expected 25bps rate hike.

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CMO Market Update

We hosted two webinars last week so please see information on them down below. Activity was steady and picked up later in the week characterized by similar investment patterns we have discussed of late. Front sequentials with slight premiums along with VADMs continue to remain popular.

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