December 20, 2021
Yields moved lower and the curve flatter last week. The Fed’s message, especially the dot plot, was certainly more hawkish that it had been. While they quickened the pace of the taper as most expected, the changes to the dot plot when compare to the prior release in September surprised some. It showed three rate hikes next year instead of two along with overall higher levels of overnight rates in the future. It was odd to me the 2-year ended the week 2 bps lower at 0.64% in the wake of what the Fed said they expected. The only conclusion I could reach at the time is that the market doesn’t seem to fully believe the Fed will have to (or be able to) be as hawkish as their tone suggest. A Bloomberg article over the weekend has similar thoughts. Also, as we have written before, the conventional cure for inflation (higher short-term rates) could also ding growth. So in a way, it makes sense, like we wrote last week, the curve moved flatter as the Fed was more hawkish than many had anticipated (especially the dot plot). Instead of the shorter end moving higher though, the long end moved lower as growth expectations are being challenged, not just from Fed actions but also as news of Omicron’s spread grows. What happens if Omicron keeps supply side issues from curing more quickly and demand remains more or less the same? This sounds like is a recipe for continued inflation. I think there is some potential for year-end volatility as trade desks tend to be more lightly staffed and plenty of uncertainty remains.
Today – Yields mostly lower, curve shape mixed, equities down again after a rough week
Yields on 2-, 3-, and 5-year maturities remain near highs this morning after declining from Friday’s close
Curve Shape – 2s5s 5 bps flatter last week, flattest since August 2021
Curve Shape – 2s10s 7 bps flatter last week, flattest since December 2020
Sector Commentary (click on links for more in-depth look)
- Agency CMBS, MBS, and ARMs
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 (December) | Monthly, 10th business day
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