Sector Update

March 1, 2021

Last week was a wild one. When the dust settled, the Treasury curve finished steeper by 5 basis and the 10-year yield up “only” 7 bps. Meanwhile 5- and 7-year maturities were both up 15 bps. During the week, specifically Thursday, the 10-year yield hit 1.60 as a weak 7-year auction (reportedly the weakest ever) pushed yields higher. There is no shortage of theories as to why the volatility and spike in yields last week. Some plausible theories include mortgage hedging activity, selling of positions by Commodities Trading Advisors (CTAs), and of course, inflation fears. It will be especially interesting to watch what happens with yields this week, especially 5-7 year maturities. If last week was some sort of “technical mishap” rather than a change based on fundamentals, yields might retrace to lower levels.

When Will Mortgage Prepays Slow Down?

That’s a great question and one we are hearing more frequently. Mortgage rates have certainly moved up, the 30-year moved +16 bps just last week to 2.97 according to the Freddie Mac PMMS. As we have discussed in the Prepay Commentary it takes time for these to work through though. We’ll have a fresh look available this Friday as new data will be available. Due to the nature of lagging data, don’t be surprised if prepayments don’t materially change from recent behavior. Looking forward though, if rates remain +/- where they are today – lower coupons could move out of the money to refinance.

Don’t Fear the Steeper (Continued from last week)

Make sure to check out the visuals below but, save the short-end, there is quite the four-week run up going on in yields. Last week, the 5-year joined the party. In general, I would say for our depository customers to not “fear the steeper”, it may have some effects on current holdings but in terms of moving forward it should be broadly positive. I think this sentiment is reflected, partly, in the NASDAQ CBNK Index posting a positive return last week while broad indices struggled. More anecdotal, but we saw robust depository activity last week – I imagine it was elsewhere too.

Webinar: Positioning Investment Portfolios for Performance

We appreciate everyone’s attendance at last week’s webinar. It was quite the week to host a webinar on positioning portfolios. Volatility like we have seen can make it more difficult to manage a portfolio, but it also brings opportunities. The important thing is keeping priorities straight and considering whether an investment supports your overall balance sheet needs. Slides and replays are available online, if you need access you can register here.

Upcoming Webinars – (Registration opens 2 weeks prior, 1 hour CPE available)

Bank 3/16: Balance Sheet Strategies Emerging from a Pandemic

Credit Union 3/18: Balance Sheet Strategies Emerging from a Pandemic

Bank 4/13: Libor Update, Are you Ready?

Credit Union 4/15: Libor Update, Are you Ready?


Treasury yields are mixed from Friday’s close and broad U.S. equity indices are all up over 2% so far. The NASDAQ Bank Index (CBNK) continues its climb after a 1.2% increase last week. As discussed earlier, intermediate yields are managing to hang in from Friday’s close. Longer-term yields are 4-7 bps higher.

Longer Maturities Moved Higher, Joined by Intermediate, Short-End Stuck, Curve Steepened

Yield Curve Shape – Don’t Fear the Steeper

Bond Index Returns – February tough month as intermediate benchmark yields spike

Equity Returns – Faded late in February, Still an impressive month for some

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

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 (February) | Monthly, 5th business day

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

WSJ: Is Inflation a Risk? Not Now, but Some See Danger Ahead

“The Fed has said it would start raising interest rates from around zero only when inflation is 2% and likely to stay above that, and the U.S. is at maximum employment. It has not, however, said what level of inflation would be too high. In January, Charles Evans, president of the Federal Reserve Bank of Chicago, said: ‘I’m not worried about inflation going up substantially beyond 2.5%. I don’t even fear 3%.’”

WSJ: Banks in Germany Tell Customers to Take Deposits Elsewhere

“The more customer deposits banks have, the more they have to park with the central bank. That is creating an unusual incentive, where banks that usually want deposits as an inexpensive form of financing, are essentially telling customers to go away. Banks are even providing new online tools to help customers take their deposits elsewhere.”

Vining Sparks: Coronavirus Chartbook

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