Sector Update

April 26, 2021

Economic news was sparse last week, and Treasury yields declined for the third consecutive week. We should keep things in perspective though, the 5- and 10-year Treasury are respectively up 46 and 64 bps YTD. The yield curve also flattened by several measures last week. Once again, keeping things in perspective, the 2s-5s and 2s-10s are 42 and 60 bps steeper for this year, respectively. There are charts and tables below where you can see this.

Last week, more details around tax increases entered the news cycle. Most notable is essentially doubling the capital gains tax for high-income households. In some states, this takes the total tax rate above 50%. Regardless of any merit, increasing uncertainty in a time of already heightened uncertainty has risks. It is easy to find those who would disagree, but it is reminiscent of legislation passed in the wake of the Financial Crisis that, regardless of any merit, increased uncertainty and could have caused a slower-than-otherwise recovery.

Meanwhile, as I’ve previously written, the bond market is struggling to square the obvious increases in economic activity, huge amounts of stimulus, the potential for inflation, and increase in taxes. To be fair, it’s a lot to digest. It will be interesting to see the FOMC’s take as their April meeting concludes this Wednesday.

A Few Points to Start Your Week

• Loan Trading webinar on May 11^th and 13^th, watch email for registration instructions
• Recently hosted a LIBOR Update webinar, replay available online – see below
• As LIBOR winds down, the VSIRP commentary will now include a Prime-based Matrix

Recent Webinar: LIBOR Update, Are you Ready?

We recently hosted a webinar on the transition away from LIBOR. We now have more clarity on specifics like the SOFR/LIBOR spread adjustments and progress toward a fix for “tough legacy contracts”. While the market has come a long way since the initial announcement, there are still some unknowns. You can view the presentation and access the slides in our Webinar Archive.

Upcoming Webinars – (1 hour CPE available)

Bank 5/11: Loan Trading

Credit Union 5/13: Loan Trading

Bank 6/15: Mortgage Market Update & Opportunities

Credit Union 6/17: Mortgage Market Update & Opportunities

Bank 6/24: 2^nd Quarter 2021 Bank Advisory Webinar

Today

Treasury yields are slightly higher from Friday’s close. Broad U.S. equity indices are higher this morning with the S&P and NASDAQ already through last week’s declines. Of note, the NASDAQ Bank Index (CBNK) and Russell 2000 were both in the green last week and continue to add this morning as well.

Long and intermediate yields decline slightly, short yields unchanged

10- and 5-year yields within 32 and 86 bps from start of 2020 – up 64 and 46 bps YTD respectively

Yield Curve Shape – 2s-5s and 2s-10s still steep, even after recent pullbacks

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

• Government/Agency Space
  • Bullet spreads unchanged for the week
    • spreads historically tight
  • Callables almost all wider
    • 5-year and in maturities, +/- 1 bp
    • > 5-year maturities, 1-3 bps wider
  • Last week, issuance $3.8 Billion — $3.9 Billion called

• Agency CMBS, MBS, and ARMs
  • SBA DCPCs were unchanged on the week
    • Spreads on seasoned collateral can be higher, more premium risk though
    • The May DCPC auction next week likely to see strong interest again
  • SBA Floating 7(a) Pool speeds for March released
    • Speeds increased slightly for equipment and real-estate
    • Growing optimism mixed with seasonal factors could indicate higher speeds in months ahead
  • Agency MBS spreads mixed 15-year 1 bp tighter and 30-year 2 bps wider
    • Freddie Mac PMMS shows mortgage rates dropped below 3%, last released 4/22
    • 30-year rate at 2.97 (-7 bps from prior) | 15-year rate at 2.29 (-6bps from prior)
      • YTD — 30-year is + 30 and 15-year is +12
  • Agency CMOs spreads were unchanged on the week
    • Spreads currently 3-6 bps wider for the year
    • Steeper curve and cut-down coupons at discounts driving some investor activity
    • April trade summary data available next week

• Municipals – Tax-Exempt Wider, Taxable Tighter
  • BQ Munis, 5-year 2 bps wider, 10-year 2 bps wider, 15-year 3 bps wider
  • GM Munis, 5-year 1 bp wider, 10-year 2 bps wider, 15-year 3 bps wider
  • Taxable Munis, 5-year 3 bps tighter, 10-year 4 bps tighter, 15-year 17 bps tighter

• Corporates – spreads tighter for the week
  • A-Rated Corporates – 2-year 3 bps tighter, 5-year 4 bps tighter, 10-year 6 bps tighter

• Vining Sparks Interest Rate Products
  • Portfolio hedging was most of desk activity last week
  • Expect increase in loan hedging as month-end closings increase this week
  • SOFR is slowly coming along and LIBOR is fading away
  • Effective today, we include both Prime- and LIBOR-based pricing matrixes
  • Let us know if you have questions about this important transition

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, 5^th business day

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

WSJ: The Fed’s Next Test Is Breaking the Ice Over Policy Shift

“Primary dealers surveyed by the New York Fed in March expected the central bank to begin cutting bond purchases in the first quarter of 2022 and finish by the end of next year. The first increase in interest rates, currently pegged near zero, would likely come some time after. Fed officials expect to leave rates unchanged through 2023, according to their own projections.”

Vining Sparks: Coronavirus Chartbook