Sector Update

August 2, 2021

Last week saw yields move lower for the fifth week in a row bringing yields back to levels not seen since February. The FOMC meeting concluded last week as many expected, with no changes to monetary policy. It was revealed that the committee has had detailed conversations regarding the timing, pace, and composition of tapering. Regarding timing, unsurprisingly, Powell said “there’s a range of views on what timing will be appropriate.”

Yields this morning have moved markedly lower in a flatter move. It is reminiscent of the moves we saw two Monday’s ago on July 19^th (see chart below). When looking at granular data this morning, 5-year yields moved up slightly with the 8:45am CDT release of the Markit US PMI survey coming in slightly stronger than expected. The underlying message was still one of suppliers struggling to meet increased demand. Yields turned lower with the 9:00am CDT releases of construction and ISM data. Construction spending was weaker than expected, and ISM data was weaker than expected.

Today – Yields down markedly and curve flatter, equities largely positive

Yields end week lower, curve flatter – led by 10-year

5- and 10-year yields back to February levels

Yield Curve Shape – 2s-5s at 62% of YTD high, 2s-10s at 64% of YTD high

Food for Thought – As 15-year mortgage rates hit new lows, a look back at prepay protection collateral

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

• Government/Agency Space
  • Bullet spreads unchanged
    • Bullet spreads remain at what appears to be their floor
    • Essentially 0 to 1 bps spreads out to 5 years, and + 6-7 for 10-year maturities
    • Relatively constant for past month, longer end has widened 1-2 bps though
  • Callables slightly tighter
    • 5-year and in maturities 1-2 bps tighter
    • 10-year and longer 2 bps tighter on longer lockouts
  • Last week, issuance $8.0 Billion — $2.2 Billion called

• Agency CMBS, MBS, and ARMs
  • SBA DCPC spreads wider by 6 bps to 20
    • The August fixed-rate SBA DCPC auction is this week
    • Issuance trending higher, spreads have been tight but did widen at last auction
    • Spreads on seasoned collateral can be higher, more premium risk though
    • Secondary pieces move quickly when available
      
      
  • SBA Floating 7(a) Pool speeds released for July showed
    • Broad increase again, more nuanced in longer WAMs though
    • Single biggest issue remains quality of labor
    • Inflation concerns continue to increase
      
      
  • Agency MBS spreads wider, 15-year 1 bp tighter and 30-year 2 bps wider
    • Freddie Mac PMMS shows “summer swoon” in rates continues
    • 30-year rate at 2.80% (+2 bps from prior) | 15-year rate at 2.10 (-2 bps from prior)
      • YTD — 30-year is + 13 and 15-year is -7
      • 30-year is +15 from all time low on 1/7/21
      • 15-year is at a new all time low for the PMMS
    • Lower coupons and/or prepay friction collateral are still in focus
      
      
  • Agency CMOs spreads unchanged on short end, 4-6 bps tighter on longer maturities
    • Spreads currently +/- 5-6 bps from start of year
    • Cut-coupons still favored by many

• Municipals
  • BQ Munis, 5-year 2 bps wider, 10-year 6 bps wider, 15-year 4 bps wider
  • GM Munis, 5-year 2 bps wider, 10-year 6 bps wider, 15-year 4 bps wider
  • Taxable Munis, 5-year 2 bps tighter, 10-year 3 bps tighter, 15-year 5 bps tighter

• Corporates
  • A-Rated Corporates – 2-year 3 bps tighter, 5-year 4 bps tighter, 10-year 3 bps tighter

• Vining Sparks Interest Rate Products
  • Volatility can be difficult to manage and hard to react to quickly
  • Be prepared if you have never done a hedging transaction, it takes time
  • Swaps can be used to efficiently adjust interest rate risk on both sides of your balance sheet
  • Full commentary has examples on both the asset and liability side of a depository balance sheet

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 (July) | Monthly, 5^th business day

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

CNBC: Treasury Dept to invoke ‘extraordinary measures’ as Congress misses debt-ceiling deadline

“The limit, a facet of American politics for over a century, prevents the Treasury from issuing new bonds to fund government activities once a certain debt level is reached. That level reached $22 trillion in August 2019 and was suspended until Saturday.”

WSJ: Reduction in Fed’s Asset Purchases Might Not Spark ‘Taper Tantrum’

“The timeline of such an adjustment could move the bond market if it differs significantly from investors’ expectations. An earlier-than-expected end to purchases could push yields higher, and a later-than-expected end could do the opposite.”

Vining Sparks: Coronavirus Chartbook