December 21, 2020
Treasury yields moved higher on maturities 3-years and longer and the yield curve steepened by 5 bps for the week ended December 18th. I wrote last week that as COVID-19 cases continued to increase this was raising anxiety levels to markets and individuals alike with Christmas and New Year holidays on the near horizon.
Even with fresh stimulus being voted on today, and likely to pass, markets are largely shrugging this off. There is reportedly a new strain of COVID-19 gaining more attention which, depending on where you read, is reportedly between 50-70% more transmittable. Strict travel restrictions are re-appearing in Europe as a result. Even with a growing vaccination program, this new wrinkle coupled with already growing cases and stressed hospital capacities, makes me wonder….
Can the Yield Curve Remain This Steep or Continue to Steepen?
First off, anything is possible, if 2020 isn’t proof enough of that – I’m not sure what is. In a year where absolute levels of yields have declined drastically, we have seen the yield curve steepen, especially since August. Sure, compared to past averages, it may not look like much, but it shouldn’t be overlooked either. All else equal, a steeper yield curve is welcomed by many investors, especially depositories facing increased liquidity and the potential for earnings pressure this can cause.
How Did the Yield Curve Get Steeper?
Mechanically speaking, the steepening yield curve from August forward is almost entirely due to an increasing 10-year Treasury yield. The 2-year Treasury has remained virtually floored, as one would expect, as the Fed continues to sit on the short end of the curve.
Sometimes Procrastination Pays Off?
NEW – Vining Sparks Interest Rate Products: LIBOR’s Denouement
In case you missed it, a few weeks ago banking regulators released a Statement on LIBOR Transition. In short, the administrator of LIBOR has announced it will continue to publish most US LIBOR rates (settings) through June 30, 2023. Yes, you read that right, an additional 18-months from the originally planned cessation date of December 31, 2021. The ARRC also recently published a Guide on the Endgame for USD LIBOR (a nice 5-page summary in my opinion).
Major U.S. stock indices are down between 0.5 and 1.2%. Treasury yields are slightly lower on maturities 3-years and longer and the yield curve is 2 bps flatter from Friday’s close.
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 (December) | Monthly, 5th business day
SBA Prepay Commentary (December) | Monthly, 10th business day
Vining Sparks Interest Rate Products: LIBOR’s Denouement
“It is clear from recent events that we have begun the final countdown to the end of LIBOR. The regulatory bodies have told us they are serious about the end of LIBOR and banks need to be moving forward with plans to adjust to the new reality.”
“This Insight contrasts the characteristics of those mortgages in forbearance across the current COVID-19 crisis and two earlier periods: the 2017 Storms period (in declared disaster areas in the aftermath of hurricanes and tropical storms in 2017, including Hurricanes Harvey, Irma, and Maria); and the Baseline period (January 2019 to February 2020) just before the current crisis.”
Vining Sparks: Coronavirus Chartbooks
PDF/Mobile: Coronavirus Chartbook (PDF)
Federal Reserve: 12/16 Federal Reserve issues FOMC statement
Federal Reserve: 11/30 Statement on LIBOR Transition
Federal Reserve: 11/25 Minutes of the Federal Open Market Committee, November 4-5, 2020
LIBOR Transition Links
ARRC 12/18: FAQs — Updated 12/18/2020
ARRC 10/15: FAQs — Updated 10/15/2020
ARRC 9/30: August – September ARRC Newsletter
ARRC 8/7: ARRC Releases the SOFR Starter Kit
Fannie Mae: LIBOR Transition Webpage
Freddie Mac: LIBOR Transition Webpage