Sector Update

February 1, 2021

Treasury yields finished last week within 1-2 bps of the prior weeks close but there was some volatility within the week. For example, the 10-year started the week at a yield of approximately 1.09, traded down to a low of 0.99 on Thursday then headed back up to close Friday at 1.07. That doesn’t hold a candle to the volatility seen in GameStop’s (GME) moves, it was up nearly 400% on the week. It will likely be, if it already isn’t, a textbook example of a market’s ability to remain irrational longer than one can remain solvent. I’ve added it to the table below, and even though GME has little-to-no bearing on what most of our readers are trying to accomplish – it’s simply too big an event to ignore in terms of the potential to disrupt orderly trading and other unknown spillover effects.

LIBOR and New York State’s Budget

A recent event to be aware of is a potential fix for contracts (corporate bonds and other securitizations are contracts) governed by New York state law that are currently tied to LIBOR. Some of these lack contractual language sufficient to facilitate a transfer in the event LIBOR no longer exists and would be difficult (at best) to modify after the fact. Here’s a Bloomberg article on the subject.

This Morning

Yields are +/- 1 bp of where they closed on Friday. Major stock indices, on the other hand, are headed up (not GameStop – GME though, but that can change at the drop of a hat). Part of this broad increase is likely due to what ailed markets last week, concern over the passage of another stimulus package. Over the weekend, Senate Republicans released a stimulus plan a third the size of Biden’s $1.9 trillion proposal. Biden plans to meet with the group this evening.

Bond Index Returns – Spread Product Bests Duration in January

Treasury Yields Jump Higher to Start 2021 – Relatively Calm Since

Yield Curve Shape – Long-end increases, Short-end held down by Fed – Will it get any steeper?

Sector Commentary (click on links for more in-depth look)

January 2021 – Benchmark Yields Increase on Reflation, Curve Steeper, Spreads Mostly Tighter

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 (January) | Monthly, 5th business day

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

Vining Sparks: MBS & Prepayment Update: Volatile 2020 Comes to an End

Last year was one for the records in the mortgage market. This presentation looks back over 2020 at what happened and how different prepay models performed over the year. Some did better than others. It is always important, but especially in this environment, that robust prepayment assumptions are used. We also make note that Bloomberg is releasing a model update and provide some background and comparisons.

Bloomberg: Libor Overhaul Gets Boost in Cuomo Bid to Avert Transition Chaos

“Provisions to help troublesome Libor-linked contracts switch to replacement rates are contained in Cuomo’s state budget plan, which was published on Tuesday. Bankers, investors and regulators see such proposals as crucial to ensuring that a large swath of the global financial system isn’t disrupted.”

Vining Sparks: Coronavirus Chartbook

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