Sector Update

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)

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

Vining Sparks Interest Rate Products: Margin Compression: Causes and Solutions

In this article, we examine why the industry is facing margin compression, challenge some of the more prevalent assumptions about banks’ risks profiles and highlight our best ideas for dealing with the current environment.

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