Sector Update

April 12, 2021



Last week we saw Treasury yields decline even with largely positive economic news. One of the more interesting moves week-over-week was the 5-year Treasury giving up the previous week’s 11 bps increase (and then some) as it’s yield fell 12 bps. The market is struggling to square the obvious increases in economic activity, huge amounts of stimulus, and the potential for inflation with the message the Federal Reserve is consistently giving about removing accommodation. In fact, the message was repeated last evening in a pre-recorded 60 Minutes interview with Chair Powell.

If you didn’t see Fed Chair Powell’s 60 Minutes interview last evening (or just prefer to read the transcript like I do) – Powell was asked no less than three times by my count, in one form or another, when accommodation from the Fed would end. Unsurprisingly, he answered no less than three times, the familiar “outcome-based” rather than calendar-based guidelines for removing accommodation including the labor market recovery being well underway (“just about complete” in Powell’s words) and inflation at or above 2% for “some time”.


A Few Points to Start Your Week


LIBOR Update: NY Legislature Passes Solution for Tough Legacy Contracts

Here is a quick update on a piece of legislation suggested by the ARRC, passed by New York State, and signed by the Governor last week. It marks an important milestone in ensuring a smooth and orderly transition away from LIBOR. It should remove a great amount of uncertainty from certain loans and bonds governed by New York State law, which are many. The impact on government and agency debt will be minimal, if any, as those will be addressed in separate efforts.


Upcoming Webinars – (1 hour CPE available)

Bank 4/13: Libor Update, Are you Ready?

Credit Union 4/15: Libor Update, Are you Ready?

Bank 5/11: Loan Trading

Credit Union 5/13: Loan Trading


Bond Academy – April 19-22, 8-Session Virtual Conference Series

We are excited to introduce our virtual Bond Academy, an 8-part series designed to provide depository portfolio managers with the basic knowledge needed to help plan and create effective investment portfolios.

Bank: 4/19 – 4/22: Two sessions daily at 10:00 am and 1:30 pm Monday through Thursday

Credit Union: 4/19 – 4/22: Two sessions daily at 11:30 am and 3:00 pm Monday through Thursday

For more information, please contact your account representative or email info@viningsparks.com.


Today

Treasury yields are slightly higher from Friday’s close. Broad U.S. equity indices are largely off this morning after the Dow and S&P hit multiple new highs last week. However, the NASDAQ Bank Index (CBNK) which is up 0.8%.



Long yields decline, Intermediate yields take a hit, Short yields give back


10-Year hovers within 16-22 bps of where it started 2020, 5-year off by 82 bps


Yield Curve Shape – 2s-5s and 2s-10s still steep, even after slight pullback








Food for Thought – MBS Prepay Speeds Released Last Week

Many investors are looking forward to next month’s speed releases. Mortgage rates have moved higher and in the May time frame will have hit over 3% and average 2.96% for the refi-window. This will push some borrowers out of the money to refinance. At the same time, mortgage rates are still historically low. Absent this cycle, the current PMMS survey of 3.18% would still be an all-time low. It’ll be interesting to see if we start to see a bifurcation of sorts between lower and higher coupons. As always, time will tell.



Sector Commentary (click on links for more in-depth look)



What We’re Reading


Market Today | Daily

Weekly Recap | Weekly, Friday

Brokered Deposit Rate Indications | Weekly, Monday

Investment Alternatives Matrix | Weekly, Tuesday

MBS Prepay Commentary (April) | Monthly, 5th business day

SBA Prepay Commentary (March) | Monthly, 10th business day


CBS News: Jerome Powell: Full 2021 60 Minutes interview transcript

“SCOTT PELLEY: Near zero interest rates are with us for how long?

JEROME POWELL: Well we’ve said that we would look at raising interest rates when the labor market recovery is just about complete, when inflation is at 2% and on track to run moderately above 2% for some time. That’s what we’ve said. I don’t have a particular calendar date for that. But we would consider raising rates at that time.

SCOTT PELLEY: So all the way through the end of this year, you wouldn’t see rates increasing?

JEROME POWELL: I think it’s highly unlikely we would raise rates anything like this year, no.

SCOTT PELLEY: 2022?

JEROME POWELL: You know, I don’t want to put a date on it. It really comes down to outcome-based guidance is what we call it. And it will not depend on the calendar. It will depend on the progress of the economy toward the goals that we’ve set, which are 2% inflation and maximum employment. When we get to that place and inflation is expected to run moderately above 2% for some time, then we’ll look at raising interest rates. And that day will come.”


WSJ: The Other Reason the Labor Force Is Shrunken: Fear of Covid-19

“A year after the pandemic burst onto the U.S. economy, 8.4 million fewer Americans hold jobs. There are many reasons, but one of the most important and least appreciated is the one that keeps Ms. McLaurin at home: fear. A U.S. Census survey conducted in the second half of March found that about 4.2 million adults aren’t working because they are afraid of getting or spreading the coronavirus.”


Vining Sparks: Coronavirus Chartbook


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