Sector Update

December 6, 2021

We wrote to watch for more volatility last week around Fed speakers and further looks at economic data. Fed speakers, notably Chair Powell on Tuesday, and jobs data on Friday didn’t fail to deliver. The way the market moved, at times, was confusing. It is likely a symptom of market participants trying to adjust their perceptions in real-time. On one hand, potential actions the Fed could take earlier than expected should push up short-term rates. Conventionally, that would help tame inflation at the expense of future economic growth and be reflected in lower yields in longer maturities. This seems to be where markets landed. When the dust settled on Friday, the curve had moved meaningfully flatter. As measured by the 2s-10s, the curve moved 22 bps flatter to levels not seen since late last year.

I recently shared Dollar Tree, Inc. announced they are rolling out a $1.25 price point at all stores nationwide after managing, for the past 35 year to maintain, a $1.00 price point. They go on to say, “This decision is permanent and is not a reaction to short-term or transitory market conditions.” Chair Powell, in a way, delivered a similar message last week during Congressional testimony when he said regarding the notion of transitory inflation that “it’s probably a good time to retire that word”. Also, of note, Powell clearly put speeding up the tapering process on the table. This could pave the way for earlier rate hikes than previously anticipated.

This week, like last, we must stay cognizant of Omicron, but my preference is to remain focused on the fundamentals. Inflation has just been “de-characterized “as transitory by the Fed. If inflation isn’t transitory, which means “not permanent”, does that mean it’s permanent barring any sort of intervention by the Fed? I can’t answer that question but if the curve remains relatively flat or continues to flatten (see graphs below) it might be prudent to consider certain adjustments in your portfolio or to new purchases.

Today – Yields higher in a slightly steeper move, equities shaking off last week

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

Curve Shape – 2s5s 12 bps flatter over last week, flattest since July 2021

Curve Shape – 2s10s 22 bps flatter over 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 (November) | Monthly, 5th business day

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

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