December 28, 2020
Treasury yields moved lower on maturities 3-years and longer and the yield curve flattened by 2 bps for the holiday shortened week ended December 24th. Most of those yield declines have been reversed this morning.
Major U.S. stock indices are up between 0.7 and 0.9%. Treasury yields are higher on maturities 2-years and longer, reversing last week’s declines and the yield curve is 1 bp steeper from Thursday’s close.
Reflecting on 2020 and Looking Forward to 2021
For the second year running, 2020 looks like another year where long duration investments are going to perform well, save a substantial market sell off in the next 3 days. If we also consider spread product (anything that isn’t a Treasury) it has been a doubly good year as spreads have largely tightened this year across most sectors (see YTD column in the Spread Snapshot below).
The table below looks back 20 years at annual returns on Treasury securities assuming an investor bought and held the security for the entire year. For example, a 10-Year Treasury bought and held for the entire year of 2019 would have produced an approximate total-return of 9.3%.
Naturally, this makes one start to wonder, what’s likely to perform well in 2021…should I keep investing in longer securities, should I gravitate towards/away from credit-related spread product, etc. etc. Fortunately, the answer to this question can (and I’d argue should) be determined by the rest of your balance sheet.
If we look back, for the last half of 2019 and into 2020 your Asset / Liability Committee probably discussed the exposure your balance sheet had if interest rates fell and the types of investments and strategies that could help mitigate this risk. Well interest rates certainly did fall and to the extent you added longer maturity securities with locked-out cashflows, that would have served your balance sheet well.
That brings us to today and looking forward to 2021. Most risk sentiment has shifted towards what if rates stay here for an extended period and simultaneously raises the question, what if rates pop up suddenly (think “taper tantrum” style in 2013). For many, longer maturity securities are still the right investment given their balance sheet exposure. What if longer maturities underperform in 2021? In a vacuum it’s possible they might; however, in the context of your entire balance sheet they might just be exactly what you need.
2020 Stock Market Produces Returns Many Wouldn’t Have Expected
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).
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.”