Sector Update

August 9, 2021

Last week yields finally broke a five-week streak of declines with yields up 6-8 bps on 3-10 year maturities. It was not without quite a bit of volatility. Through Wednesday of last week, yields were lower for the week even after a wild Wednesday morning that saw yields plummet on a weak ADP report at 7:15am then rocket higher on a strong ISM report at 8:45am (all times CDT). Yields continued to push higher on Thursday and Friday on strong economic data, notably payrolls on Friday.

Activity last week can be generalized as more customers selling than usual earlier in the week and increased purchase activity in the later. There is still sizable liquidity among depositories and after watching yields decline for five straight weeks, the move up after seeing them initially slip further to start the week, was welcome.

Looking at several charts below, one can’t help but wonder if last week began a new trend or if it was just another bump up in yields in a longer trend downwards. Unfortunately, I can’t answer that question, but I do know this. After seeing the 5-year trade as low as 0.61% last Wednesday, even if just for a brief moment, the ~0.80% we see this morning seems to have focused investors, especially considering the highest close this year is 0.98%.

Today – Yields up and curve slightly steeper, equities mixed

Yields end week higher, curve steeper

5- and 10-year yields still in February territory, start of new trend?

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

Food for Thought – Prepay speeds released last week, slower but still elevated

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

• Government/Agency Space
  • Bullet spreads 1-2 bps wider
    • Bullet spreads highest in at least 6 weeks, 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 4 bps though
  • Callables wider
    • 5-year and in maturities 1-3 bps wider
    • 10-year and longer 3 bps wider
  • Last week, issuance $1.6 Billion — $2.3 Billion called

• Agency CMBS, MBS, and ARMs
  • SBA DCPC spreads wider by 5 bps to 25
    • The August SBA DCPC auction was last week, 20- and 25-year maturities
    • 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 scheduled for release later this week
    • The NFIB Small Business Optimism Index will be released tomorrow
    • Steadily risen this year, will be interesting to see if Delta concerns in July took a toll
    • 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 2.77% (-3 bps from prior) | 15-year rate at 2.10 (unch. from prior)
      • YTD — 30-year is + 10 and 15-year is -7
      • 30-year is +12 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 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 8 bps tighter, 10-year 8 bps tighter, 15-year 5 bps tighter
  • GM Munis, 5-year 14 bps tighter, 10-year 21 bps tighter, 15-year 18 bps tighter
  • Taxable Munis, 5-year 4 bps tighter, 10-year 1 bp wider, 15-year 7 bps wider

• Corporates
  • A-Rated Corporates – 2-year unchanged, 5-year 6 bps tighter, 10-year 9 bps tighter

• Vining Sparks Interest Rate Products
  • Rates volatile last week, 10-year swap ranged from 1.14 to 1.32 in a 48-hour period (1.33 currently)
  • Volatility can be difficult to manage and hard to react to quickly
  • Be prepared for opportunities, 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

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 (July) | Monthly, 10^th business day

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.

WSJ: An Ohio Factory’s Test: Will Higher Wages Help More Than They Hurt?

“Whatever the outcome, Mr. Braun knows there’s no going back. It’s difficult to reverse higher wages for existing employees once they’re put in place, he said, and he was prepared for the increases to come out of his pocket.”

Vining Sparks: Coronavirus Chartbook and Coronavirus State Charts