Sector Update

September 25, 2017

While considerably smaller yield increases occurred across most of the bond market last week than during the week prior, consistency across terms and sectors suggested the change in sentiment held firm. Ten-year Treasury yields rose 1bp to 2bp every day until Friday, when they fell 3bp. This Treasury term served as a good proxy for much of the overall market last week, as similar yield increases occurred across the two through ten year portion of the Treasury curve. Beyond ten years, yields only rose a couple of basis points. The slope of the Treasury curve inside of two years increased over 15bp during the two most recent weeks while the balance of the curve moved in an almost parallel fashion.

Characterizing the last two weeks’ Treasury market selloff as a manifestation of the risk-off nature of overall market activity overlooks the very similar yield increases across most other bond market sectors. With the exception of municipal debt, investment grade products underwent yield movements consistent enough with Treasuries to cause very little in the way of spread changes. While current market conditions may not leave a lot of room for anything spectacular in terms of spread tightening, the fact that these spreads remained more or less intact during the Treasury yield increases of the last two weeks suggests some mischaracterization of reasons for the yield increases, development of a buying opportunity in spread products, or some combination of both.

Many portfolio managers sprung to life last week with activity levels in most investment grade products far in excess of what was typical during the last couple of months. In some cases investors merely reacted to the best yield levels since July. Some redeployment of funds accumulated during the heavy bond market redemptions of recent months occurred, with higher yields providing the needed inspiration for previously delayed purchases. Portfolio adjustments also continued, as the economics of returning portfolios that had rolled down in term to longer duration targets became much more compelling.

Friday’s five-year Treasury closing yield of 1.86% exceeded the daily closing average year-to-date by 1bp and exceeded by 8bp the average for the last year of trading. The ten-year Treasury finished Friday at 2.25%, 6bp below the year to date average and right on top of the average for the last year.

Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries were unchanged for the week, while spreads on fixed-rate MBS continued to tighten. The divergence has caused valuations on ARMs to look more appealing on a relative value basis.

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Agency Market Update

For the second consecutive week, Agency yields experienced a modest improvement last week. Two-year Agency yields increased by 5 bps to 1.49%, 5-year Agency yields climbed 5 bps to 1.95%, and yields on 10-year Agencies were higher by 5 bps to 2.60%.

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Fixed Rate Mortgage Market Update

Mortgage rates and Treasury yields rose again last week with a continuation of slightly tighter mortgage yield spreads even as the Fed announced plans to begin the unwind of the balance sheet in October. Mortgage applications for the week ending September 15 gave back almost all of their previous week’s 9.9% gain, falling 9.7%.

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Municipal Market Update

Municipal bond funds posted inflows for the 11th week, as weekly reporting funds experienced $573.978MM of inflows in the latest reporting week, after experiencing inflows of $241.383MM the week prior. The four-week moving average was positive at $573.978MM, after being in the green at $396.692MM the week prior.

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SBA Market Update

Last week was extremely active with portfolio managers adding both floating-rate and fixed-rate SBAs to their portfolios. Floating-rate additions were mostly new issue equipment-backed pools, although seasoned real-estate pools were also in the mix. The semi-annual SBIC issuance continues to be a fixed-rate component of a barbell investment strategy.

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