Sector Update

December 13, 2021

Yields moved higher and the curve steeper last week as markets reacted to news, at the time, that the Omicron variant may be less severe than some had anticipated. Through Wednesday, maturities 3-years and longer were up 15-20 bps. Yields gave back a few bps through the end of the week. The initial yield curve reaction to Friday’s inflation numbers was puzzling to me. CPI figures hit a nearly four-decade high and 5- and 10-year yields dropped 6-7 bps (they later recovered some). Year-over-year inflation was 6.8% and month-over-month was 0.8%. True, markets trade on forward expectations, so perhaps even higher inflation was partly priced in and needed to unwind since it was “only” 6.8%. The month-over-month rate of increase declined from 0.9% to 0.8% or from 10.8% to 9.6% on an annual basis. I’m not certain that provides the Fed, consumers, or President Biden much comfort.

That leads us to what will likely be this week’s biggest (non-Covid) source of volatility. The Fed’s final meeting of 2021. Many widely expect the pace of the taper to be doubled. Not wanting to raise short-term rates until the taper is complete, this could potentially open the door for earlier rate hikes than previously anticipated. They will also update their dot-plot. The last time the dot-plot was updated there was still a case inflation might be transitory. Fed Chair Powell seemed to remove that notion from the table two-weeks ago saying it was time to “retire” that word. Still, committee members have different opinions, and the dot-plot will be interesting to watch in that regard. At a high level, if the Fed is more hawkish than anticipated I’d expect the curve to continue flattening. If they are more dovish (which seems unlikely to me) then I’d expect the curve flattening we have seen of late to reverse and the curve steepen.

Today – Yields lower, curve flatter, equities down after notching impressive gains

Yields on 2-, 3-, and 5-year maturities remain near highs this morning after decreasing from Friday’s close

Curve Shape – 2s5s 5 bps wider last week, flattest since August 2021

Curve Shape – 2s10s 7 bps wider last week, flattest since December 2020

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

What We’re Reading

Market Today | Daily

Weekly Recap | Weekly, Friday

Monthly Review (November) | Monthly, 1st business day

Brokered Deposit Rate Indications | Weekly, Monday

Investment Alternatives Matrix | Weekly, Tuesday

MBS Prepay Commentary (December) | Monthly, 5th business day

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

WSJ: Global Central Banks Diverge as Omicron Clouds Growth, Inflation Outlook

“By contrast, in the U.S., where the economy is expanding rapidly and inflation is highest among major economies, Federal Reserve Chairman Jerome Powell is expected to signal a faster wind-down of the bank’s giant bond-buying program on Wednesday, likely setting the stage for U.S. interest-rate increases next year.”

Vining Sparks: Strategic Insight: Year-End Balance Sheet Management

As the end of 2021 approaches and planning for next year begins, we have developed several balance sheet and portfolio management strategies considering the current banking landscape and challenges that could weigh on future profitability. Additionally, we have updated our annual Year-End Checklist to help serve as a guide through the planning process.

Vining Sparks: Loan Trading: RV Market Analysis

Historically low interest rates, several rounds of stimulus, and pent-up travel demand all helped contribute to RV shipments ending 2020 with a 6% increase over 2019 and on par with the third best year ever despite shutdowns. Positive momentum has continued so far in 2021 setting new all-time highs in each of the last nine months.

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: 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.
Copyright © 2023
This is a publication of Vining-Sparks IBG, LLC
775 Ridge Lake Blvd., Memphis, TN 38120