Sector Update

August 16, 2021

Last week yields on maturities 5-years and in managed to hang on to prior increases while longer yields declined. Like the week of August 2^nd, it was not without volatility though. Through Thursday of last week, yields were 5-6 bps higher for the week even after a Wednesday morning CPI release that was still elevated but showed some signs of easing. Meanwhile, the Dow and S&P 500 closed at new successive highs on Tuesday, Wednesday, and Thursday.

This all changed Friday morning with a horrible Consumer Confidence reading. It wasn’t necessarily a surprise that it would decline but how low it fell was. For context, the reading was lower than at any point during the pandemic, but not by much. Also, over the weekend, the collapse of Afghanistan’s government and seizure of power by the Taliban is weighing on markets today.

Activity was brisk and varied across all sectors last week. The recent move upward in yields certainly focused investors. There is still sizable liquidity among depositories and after watching yields decline for five straight weeks, the continued move up last week was welcomed even though yields faded later in the week.

Same as last week, one can’t help but wonder if what we have seen over the past two weeks is the reversal of a down trend or if the moves were just another bump up in yields in a longer trend downwards. I don’t have the answer to that question, but it is worth remembering the 5-year traded as low as 0.61% just 8 trading sessions ago, even if just for a moment.

Today – Yields off 2-3 bps and curve slightly flatter, equities down

Yields end week relatively flat, longer yields decline, curve slightly flatter

Week-over-week, yields barely budge from prior week selloff

Yield Curve Shape – 2s-5s and 2s-10s break above 20-day MA for first time since June

Food for Thought – Small business optimism has largest decline since November 2020

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

• Government/Agency Space
  • Bullet spreads unchanged
    • Bullet spreads higher than recent but still at absolute low levels
    • Essentially 1 to 2 bps spreads out to 5 years, and + 7-9 for 10-year maturities
    • Relatively constant for past month, longer end has widened
  • Callables tighter
    • 5-year and in maturities 1-2 bps tighter
    • 10-year 3-4 bps tighter
    • 15-year unchanged
  • Last week, issuance $2.3 Billion — $3.3 Billion called

• Agency CMBS, MBS, and ARMs
  • SBA DCPC spreads unchanged on the week at 25 bps
    • The August SBA DCPC auction was recently held
    • The 25-year maturity represented 85% of total issuance for August
    • Auction spreads moved wider for 2^nd month in a row
    • Spreads on seasoned collateral can be higher, more premium risk though
    • Secondary pieces move quickly when available
      
      
  • SBA Floating 7(a) Pool speeds released last Friday (8/13)
    • • Prepayments picked up, more so in longer real-estate pools
      • NFIB Small Business Optimism Index declined in most recent survey
      • Single biggest issue remains quality of labor
      • 49% report having job openings they are unable to fill, breaking a 48-year record
      • Inflation concerns eased but remain elevated
        
        
  • Agency MBS spreads were tighter, 15-year 4 bps tighter and 30-year 2 bps tighter
    • Freddie Mac PMMS shows mortgage rates higher
    • 30-year rate at 2.87% (+10 bps from prior) | 15-year rate at 2.15 (+5 bps from prior)
      • YTD — 30-year is + 20 and 15-year is -2
      • 30-year is +22 from all time low on 1/7/21
      • 15-year is +5 from all time low on 8/5/21
    • Lower coupons and/or prepay friction collateral are still in focus
      
      
  • Agency CMOs spreads unchanged on the week
    • Spreads currently +/- 5 bps from start of year
    • Cut-coupons still favored by many
    • In floaters, by accepting a lower cap, can earn a higher up-front yield
      
      
• Municipals
  • BQ Munis, 5-year unchanged, 10-year 2 bps wider, 15-year 4 bps wider
  • GM Munis, 5-year unchanged, 10-year 2 bps wider, 15-year 4 bps wider
  • Taxable Munis, 5-year 1 bp tighter, 10-year 4 bps tighter, 15-year 1 bp tighter

• Corporates
  • A-Rated Corporates – 2-year 3 bps wider, 5-year 8 bps wider, 10-year 13 bps wider

• Vining Sparks Interest Rate Products
  • A few things customers have been doing lately
  • SMART loans – customer can lock in longer-term fixed rate while the bank receives a floating rate
  • Bond portfolio hedging – can convert fixed rate securities to floating rate and reduce duration exposure
  • Receive fixed swaps – can use on both asset/liability side of your balance sheet (more detail in writeup)
  • Caps – can protect against an unexpected rise in rates

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 (August) | Monthly, 5^th business day

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

WSJ: Fed Officials Weigh Ending Asset Purchases by Mid-2022

“Officials at their July 27-28 meeting deliberated on two important questions: when to start paring their monthly purchases of $80 billion in Treasury securities and $40 billion in mortgage securities, and how quickly to reduce, or taper, them. The Fed is set to release on Wednesday minutes of the meeting that could provide further clues about those discussions.”

Vining Sparks: MBS & Prepayment Update

This presentation looks back over 2021 and how different prepay models have performed so far this year. It is always important, but especially in this environment, that robust prepayment assumptions are used. We also make note that Yield Book is scheduled to release a model update and provide some background and comparisons.

Vining Sparks: Loan Trading: Auto Market Analysis

Auto loans continue to be a large part of our customers’ loan portfolios and a participation class that remains in favor. It is important to stay abreast of market changes in rates and potential credit concerns that may be creeping in that could impact production and performance.

Vining Sparks: Strategic Insight: New SBA 504 Debt Refinancing Program

The SBA recently published a rule implementing section 328 of the Economic Aid Act. Section 328, titled Low-Interest Refinancing, revises the requirements for refinancing debt with an SBA 504 Loan. The net effect of these revisions points towards greater ease and availability for certain borrowers, who were previously disallowed, to refinance using an SBA 504 loan.

Vining Sparks: Strategic Insight: CU Risk-Based Capital Update

After having been delayed multiple times, the NCUA’s risk-based capital provisions finalized in 2015 (2015 Final RBC Rule) are currently scheduled to go into effect January 1, 2022. The 2015 Final RBC Rule only applies to federally insured credit unions with assets greater than $500 million. Institutions with less than $500 million in assets are exempt from the 2015 Final RBC Rule.

Vining Sparks: Coronavirus Chartbook and Coronavirus State Charts