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)

• Government/Agency Space
  • Bullet spreads move 1-3 bps wider, first move wider since late July
  • Callable spreads moved wider
    • 5-year and shorter unchanged, longer lockouts moved 3 bps wider
    • Longer maturities 4-8 bps wider
  • Last week, issuance $4.1 Billion — $93 Million called

• Agency CMBS, MBS, and ARMs
  • SBA DCPC spread 1 bp tighter
    • Monthly DCPC auction this week, expect strong demand
    • Spreads on seasoned collateral can be higher, more premium risk though
      
      
  • SBA Floating 7(a) Pool factors recently released and prepay speeds are available
    • 16% of NFIB respondents list inflation as their single most important problem
    • 49% still have job openings they are unable to fill, a slight improvement from previous at 51%
      
      
  • Agency MBS spreads were wider, 15-year 1 bp tighter and 30-year 8 bps wider
    • Freddie Mac PMMS shows mortgage rates mixed
    • 30-year rate at 3.11% (+1 bp from prior) | 15-year rate at 2.39 (-3 bps from prior)
      • YTD — 30-year is + 44 and 15-year is +22 bps
      • 30-year is +46 from all time low on 1/7/21 of 2.65
      • 15-year is +29 from all time low on 8/5/21 of 2.10
        
        
  • Agency CMOs spreads were unchanged across the stack
    
    
• Municipals – spreads wider across the board
  • BQ Munis, 5-year 16 bps wider, 10-year 20 bps wider, 15-year 14 bps wider
  • GM Munis, 5-year 3 bps wider, 10-year 13 bps wider, 15-year 14 bps wider
  • Taxable Munis, 5-year 8 bps wider, 10-year 14 bps wider, 15-year 15 bps wider

• Corporates
  • A-Rated Corporates – 2-year 7 bps wider, 5-year 13 bps wider, 10-year 3 bps wider

• Vining Sparks Interest Rate Products
  • Volatility continued last week with Omicron and the Fed indicating earlier transition to tightening mode
  • Seeing more interest in loan hedging as borrowers express concerns about inflation
  • Included this week is a way to take advantage of the current dip in rates and limit the chances of losing commercial borrowers to other lenders

What We’re Reading

Market Today | Daily

Weekly Recap | Weekly, Friday

Monthly Review (November) | Monthly, 1^st business day

Brokered Deposit Rate Indications | Weekly, Monday

Investment Alternatives Matrix | Weekly, Tuesday

MBS Prepay Commentary (November) | Monthly, 5^th business day

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

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