Sector Update

August 30, 2021

Ending a two-week run of flattening, the yield curve steepened last week. Yields on maturities 3-years and in dropped or remained unchanged while longer maturities increase by 2-5 bps. Save Monday, yields increased throughout the week, peaking on Thursday as three separate Fed officials opined that the time to taper was “sooner rather than later” as Esther George, Chair of the Kansas City Fed, said. As you can notice in the chart below though, come Friday, Powell’s remarks sent yields down 4-5 bps as the tone was still interpreted as dovish. The S&P and NASDAQ closed at new record highs on Friday.

As benchmark yields increased during the week, demand was varied across sectors. Agency activity was concentrated in the 5-year area. In tax-free municipal securities, 4% and 5% coupons dominated activity with most maturities 20-years and shorter. On the Corporate desk, once the 10-year broke through 1.30% on Wednesday, activity picked up. In MBS, 15-year saw the most activity, but 20-year was a close second. In CMOs, cut-down coupons remained popular. The most common cut-coupons last week were 1.25 and 1.50.

Today – Yields down 2-3 bps, curve slightly flatter, equities largely up

Curve ends week slightly steeper, longer yields increase, shorter yields unchanged

Week-over-week, intermediate and longer yields climb

Yield Curve Shape – 2s-5s remains above 20-day MA while 2s-10s pushed back through last week

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 (August) | Monthly, 5th business day

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

WSJ: Treasury Demand Shows Resilience as Fed Signals Bond-Buying Pullback

“Many Wall Street analysts and investors continue to argue that yields are bound to rise based on surging U.S. inflation, a still solid economic outlook and the approaching reduction in central-bank bond purchases. But the market so far hasn’t cooperated, reflecting continuing demand from around the globe.”

Vining Sparks: Strategic Insight: Price Volatility on Tax-Free Municipal Bonds

Have you ever wondered why the price volatility you see on tax-free municipal bonds is less than comparable taxable bonds? At Vining Sparks, we consider taxes when measuring interest rate risk on tax-free municipal bonds. The rationale is simple: taxes matter. In this Strategic Insight, we look at the implications of ignoring taxes and why we think it makes sense to consider them.

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

The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
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