Sector Update

January 4, 2021

For the shortened week ended December 31st, Treasury yields moved flatter with yields on 10-year and longer maturities declining 1-2 bps. Included this week are a number of charts/graphs looking back over 2020 along with some reflections and thoughts on how to approach 2021. Also, from our economic team, here’s their 2020 Year-In-Review. Spoiler alert: 2020 only received 1 out of 5 stars.

This Morning

After ending the year at record levels (S&P 500 and Dow), major U.S. stock indices are slipping to start the year. Meanwhile, Treasury yields are virtually unchanged from Thursday’s close.

An important factor for where yields head this week, especially on 7+ year maturities, is the outcome of the two Georgia Senate races. There are many moving pieces, but if Democrats win control of the Senate markets will have to recalibrate what this means for future stimulus, deficits, inflation, and taxes.

2020 Equity Returns Surprise – Varied Widely based on Constituents

Yield Curve Moves Markedly Steeper

Treasury Yields Volatile – Settle as Year Progresses

Longer Maturities, Tightening Credit Spreads, and Fed Purchases Drive Returns

Reflecting on 2020 and Looking Forward to 2021

For the second year running, 2020 was another year where longer-duration securities performed well. 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 2020 column in the Spread Snapshot below).

I’ve included a table above looking 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 2020 would have produced an approximate total-return of 11.4%, of course the lions share coming from price appreciation as yields fell ~100 bps in that portion of the yield curve.

Considering this and other charts and tables included in this week’s publication naturally causes one 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 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. If 2020 reminded us of anything, it’s that managing to your risk position, within reason, is always the right call.

Sector Commentary – Q4 2020 Wrap-Up

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

WSJ: Biden Administration Could Unsettle Banks in More Than One Way

“But Fed officials also might try to limit how much Treasury yields rise. Memories of the 2013 “taper tantrum,” when expectations the Fed was about to reduce its bond purchases pushed yields higher, stifling the recovery, are still fresh.”

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.”

Vining Sparks: Coronavirus Chartbooks

PDF/Mobile: Coronavirus Chartbook (PDF)

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