Sector Update

August 23, 2021

For the second week in a row, the yield curve moved slightly flatter to end last week. Yields on maturities 5-years and in managed to hang on and even increase slightly while longer maturity yields declined. Unlike previous weeks though, last week felt, and in fact was, less volatile. If you look back over the past two weeks (see charts below) the 5-year is up 1 bp but has traded as high as 0.84% and as low as 0.72%.

Activity was brisk and varied across all sectors last week. Of note, municipals were especially active as August is the biggest roll-off month of this year. Municipals at a high level saw the most purchases in the 15- up to 20-year maturity bucket. In terms of coupons, activity was the greatest in lower (2.0s) and higher (5.0s) coupons. This dichotomy is a common trade-off we see many considering. Some municipal investors prefer shorter final maturities with lower coupons while others may favor higher coupons but longer final maturities.

Everyone is looking forward to Jerome Powell’s comments at Jackson Hole this Friday. It’s doubtful he will say anything that would surprise markets drastically. It seems markets are acutely aware of the threat the Delta variant poses to economic growth (see equity markets last week) and with last week’s FOMC minutes pointing to a late 2021 taper as many expected, I’m not sure what that leaves. As always, we’ll know more next week. In the meantime, it is worth reviewing your portfolio for positions worth exiting as the 3^rd quarter enters its final month next week and planning for 2022 begins to move to the forefront.

Today – Yields virtually unchanged across the curve, equities rebounding

Curve ends week slightly flatter, longer yields decline, shorter yields increase

Week-over-week, yields hold steady from early August selloff

Yield Curve Shape – 2s-5s and 2s-10s break above 20-day MA while 2s-10s slipped back below last week

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

• Government/Agency Space
  • Bullet spreads mixed +/- 1 bp for the week
    • Bullet spreads higher than recent but still at absolute low levels
    • Relatively constant for past month, longer end has widened
  • Callables unchanged to 1 bp tighter
    • Most maturities unchanged for the week
    • 5-year maturities 1 bp tighter
  • Last week, issuance $3.5 Billion — $4.5 Billion called

• Agency CMBS, MBS, and ARMs
  • SBA DCPC spreads unchanged on the week at 25 bps
    • The 25-year maturity represented 85% of total issuance in August
    • Spreads are 11 bps wider over the past month, 4 bps tighter YTD
    • Spreads on seasoned collateral can be higher, more premium risk though
    • Secondary pieces move quickly when available
      
      
  • SBA Floating 7(a) Pool speeds recently released (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 wider, 15-year 3 bps wider and 30-year 6 bps wider
    • Freddie Mac PMMS shows mortgage rates +/- 1 bp from prior week
    • 30-year rate at 2.86% (-1 bp from prior) | 15-year rate at 2.16 (+1 bp from prior)
      • YTD — 30-year is + 19 and 15-year is -1
      • 30-year is +21 from all time low on 1/7/21 of 2.65
      • 15-year is +6 from all time low on 8/5/21 of 2.10
    • 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
      
      
• Municipals
  • BQ Munis, 5-year 8 bps tighter, 10-year 4 bps tighter, 15-year 2 bps tighter
  • GM Munis, 5-year 1 bp tighter, 10-year 2 bps wider, 15-year 5 bps wider
  • Taxable Munis, 5-year 1 bp wider, 10-year unchanged, 15-year 2 bps tighter

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

• Vining Sparks Interest Rate Products
  • Continue to see interest in hedging longer term investment securities to help mitigate capital at risk
  • For long-term success, offer products customers want while controlling risk and earning acceptable returns
  • Actively supplement the “retail bank” with the “wholesale bank”
  • Say no to some customers
  • Use derivatives

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 Chairman Powell Navigates the Inflation Debate

“Mr. Powell falls somewhere in between. He has brushed aside talk of raising rates, but during his tenure he has often adopted a “risk-management” approach that preserves the Fed’s ability to shift course if the outlook changes quickly. Tapering the Fed’s $120 billion a month in purchases of Treasury and mortgage securities sooner or faster than previously anticipated would provide such flexibility.”

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