Sector Update

September 5, 2017

Last week yields across most of the bond market increased by tiny amounts, offsetting the tiny declines from the prior week. For the third consecutive week yields and spreads finished in such close proximity to where they started as to make comments about curve shape and changes in relative value almost moot. Treasury yields increased 1bp to 2bp across the Treasury curve, aside from a 1bp decline for the ten-year maturity. Small intraday yield movements occurred, with the five-year Treasury staying within a narrow 7bp trading range and the ten-year staying within a 12bp trading range.

Minimal transitions in relative value between sectors took place last week. While very small yield spread changes versus Treasuries occurred, the changes were fairly consistently in a positive direction. Most investment grade choices widened 2bp or less, with longer-maturity municipal yields providing an exception by widening 2bp or so.

Bid lists continued to surface last week at a pace similar to the week prior, as the extended period of stable prices enabled bond switches and portfolio restructuring to occur more easily than usual. This ease results from the similarity between market prices at time of execution to the prices at the time trade analysis was performed. While the volume of such trades was not heavy, it exceeded what would be suggested by such narrow trading ranges. Meanwhile, heavy redemptions in the municipal and agency sectors in particular remain unanswered by reinvestment flows, suggesting some cash accumulation.

On Friday, the five-year Treasury closed at 1.74%, 12bp below the daily closing average year-to-date and right on top of the average for the last year of trading. The ten-year Treasury finished at 2.17%, 16bp below the year-to-date average for the daily closing yield and 5bp beneath the average daily close for the last year.


Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries were unchanged on the week. Activity in the market was narrowly focused on post reset hybrid ARMs. Investors concentrated on buying seasoned GNMA ARMs with a weighted average loan age of 60 to 100 months and coupons ranging from 2.25% to 2.625%.

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Agency Market Update

Agency yields were mixed but very stable last week. For the week, two-year Agency yields were unchanged at 1.41%, the 5-year Agency yield fell 2bps to 1.83%, and yields on 10-year Agencies held firm at 2.52%.

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Fixed Rate Mortgage Market Update

Trading activity across the MBS and CMO sectors was active mid-week last week as the mortgage and overall bond market continues to trade in a tight range with minimal changes in yield spreads. Mortgage rates rose 3bps last week and mortgage applications fell 2.3% on a 2.7% drop in purchase apps and a 2.0% decline in refi apps.

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Municipal Market Update

Municipal bond funds posted inflows for the sixth week, as weekly reporting funds experienced $344.518MM of inflows in the latest reporting week, after experiencing inflows of $750.500MM the week prior. The four-week moving average was positive at $578.250MM, after being in the green at $528.082MM the week prior.

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SBA Market Update

Investors continued to add floating-rate SBAs to their portfolios last week with the majority of activity focused on seasoned paper. In addition, portfolio managers looked to add yield as they extended duration by adding DCPCs. Investors are looking forward to the September DCPC auction, as recent supply of fixed-rate SBAs has been limited.

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