Sector Update

September 4, 2018

Small yield movements last week left yields for long term investment grade debt slightly higher and yields at the short end of most curves slightly lower. The US Treasury curve twisted counterclockwise slightly with a pivot point at the four year maturity. While curve steepening defies recent tendencies, no point on the Treasury curve moved more than 3bp and such small movements leave the long term trend toward a flatter curve intact.

Not much change in relative value between sectors occurred last week. Credit risk underperformed optionality as callable agency debt spreads mostly finished tighter while  corporate debt yield spreads widened slightly versus Treasuries. In almost all cases spreads finished within 5bp of the week prior, so not much about market sentiment should be read into the spread outcomes. However, it is still a little interesting that spread direction seemed the opposite of what headlines would have suggested in each of the last two weeks, with disconcerting news headlines seemingly more conducive to wider credit spreads the prior week and improvement in the tone of news last week more suggestive of tighter spreads. Meanwhile, a couple of weeks of almost no market volatility should seemingly lead to tighter callable spreads, especially when those spreads remain wide relative to recent months of history. Perhaps more than anything else this illustrates a tendency in times of minimal market movements to attempt to read meaning into price or yield action too small to really indicate much about market tone.

Activity trends last week featured similar amounts and types of portfolio restructuring and bond switching to the prior few weeks. Considerable two way flows in the municipal sector continued as bank and other corporate investors explored yield impacts of lower tax rates for 2018 amidst strong bids from investors taxed as individuals at higher tax rates. Other sectors experienced two-way flows as well, though restructuring of portfolios comprised a much smaller fraction of overall business outside the municipal sector, as much of the flow consisted merely of redeployment of portfolio cash flows.

Friday’s five-year Treasury closing yield of 2.67% exceeded the daily closing average so far this year by 6bp and exceeded by 24bp exceeded the average for the last year. The ten-year Treasury finished at 2.86% Friday, 3bp below the year-to-date average and 18bp above the average for the last year.

Adjustable Rate Mortgage Market Update

Seasoned ARM spreads have widened over the past few weeks as a result of the heavy seasoned bond selling.  Some of this has been justified as the market prices in faster prepayments at the first reset date.  However, longer reset ARMs have also widened, which should be less impacted by at-reset speeds due to their lower dollar price and longer time to reset.

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Agency Market Update

The Treasury yield curve steepened modestly last week with spreads between 2-year and 10-year maturities widening to 23 basis points.  Agency yields moved largely in line with Treasuries, with front-end bullets cheapening by 1-2 basis points in the 2- to 5-year part of the curve.  Yields for 2-year bullets are trading at 2.69%, and 5-year bullet yields moved to 2.82%

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Fixed Rate Mortgage Market Update

During the past week, 15-year MBS yield spreads to Treasuries were unchanged while spreads for 30-year MBS to Treasuries widened by 1bp.  However, over the past month, spreads have widened by 2bps to 4bps, and currently sit near their widest points of the year.

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Municipal Market Update

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

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SBA Market Update

SBA activity is expected to be focused on the DCPC auction Thursday, which includes 10yr, 20yr and 25yr terms.  Investors have also remained active in floating rate equipment pools offered at par and premium pricing as yields on SBA floating rate pools moved higher over the last month and are likely to move higher if the Fed raises rates later this month.

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CMO Market Update

For the month of August, investors continued to favor fixed-rate CMOs, so much so that the percentage of trades representing floating-rate CMOs in August was 0%. The average fixed-rate CMO Vining Sparks traded in August yielded 3.10% and had a WAL of 3.7.

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