Sector Update

March 29, 2021



Last week ended a seven-week run up of Treasury yields and a steeper yield curve. It had to end at some point.  The 10-year Treasury ended the week down 4 bps to yield 1.68, the 5-year down 1 bp to yield 0.87, and the 2-year down 1 bp to yield 0.14. The curve flattened 3 bps. Don’t let one week weigh unnecessarily on you though. If you look throughout the charts below, the trend, even before the previous seven-week run, was broadly towards a steeper curve and increasing intermediate to longer yields. This makes sense as economic data, and perhaps what some of us witness in our daily lives, is an awakening of an economy as vaccination progress and economic stimulus simultaneously flow through.


LIBOR Update: NY Legislature Passes Solution for Tough Legacy Contracts, Awaits Governor’s Signature

Here is a quick update on a piece of legislation suggested by the ARRC, passed by New York State, and awaiting the signature of Governor Cuomo. If signed, it will mark an important milestone in ensuring a smooth and orderly transition away from LIBOR. It should remove a great amount of uncertainty from certain loans and bonds governed by New York State law, which are many. The impact on government and agency debt will be minimal, if any, as those will be addressed in separate efforts.


A Couple Points to Start Your Week

First, we have multiple webinars coming up, see “Upcoming Webinars” below. Second, in the Food for Thought section, we look at the outstanding universe of 20- and 25-year maturities in advance of the April DCPC auction next week.


Weeks with Higher Yields, Steeper Curve – 1 2 3 4 5 6 7 …0

Last week marked the end of a seven-week run where the yield curve steepened and intermediate and longer-term yields marched higher. True, there is nothing “magic” about consecutive weeks of increases in yields, it doesn’t happen often though (neither do pandemics). Based on 10-year Treasury yields, the most recent streak was only the fourth time since 2000 for this to occur.



Mortgage Prepay Speeds Released Next Week

Many MBS investors should be interested in the prepay speed release next week. Mortgage rates have certainly moved up, the 30-year moved +44 bps over the last six weeks to 3.17 and the 15-year has moved +26 bps to 2.45 according to the Freddie Mac PMMS. As we have discussed in the Prepay Commentary it takes time for these to work through though. Robust prepayment models like Yield Book and Bloomberg’s BAM incorporate the recent movement up in yields and rates and are broadly predicting future slowdowns in refinancing activity. This next reading could offer a first glimpse at declining refi activity.


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

General 4/8: Vining Sparks’ 2nd Quarter Economic Outlook

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

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


Bond Academy – April 19-22, 8-Session Virtual Conference Series

We are excited to introduce our virtual Bond Academy, an 8-part series designed to provide depository portfolio managers with the basic knowledge needed to help plan and create effective investment portfolios.

For more information, please contact your account representative or email info@viningsparks.com

Bank: 4/19 – 4/22: Two sessions daily at 10:00 am and 1:30 pm Monday through Thursday

Credit Union: 4/19 – 4/22: Two sessions daily at 11:30 am and 3:00 pm Monday through Thursday


Today

Treasury yields are higher from Friday’s close and the curve is slightly steeper. Broad U.S. equity indices are down so far this morning. Earlier today, the Director of the CDC, Rochelle Walensky, said while there is much reason for hope “…right now I’m scared”. She sees similarities between the current U.S. trajectory and that of the EU in the prior weeks.



Equity indices mixed in March


Higher benchmark yields will weigh on March returns


Seven Week run of higher yields and steepening ends, what happens now?


10-Year yield within 20 bps of where it started 2020, 5-year off by 81 bps


Yield Curve Shape – Don’t Fear the Steeper






Food for Thought – SBA DCPC Investments

With the upcoming April DCPC auction next week, I thought it’d be interesting to take a look at the outstanding universe. Sometimes, investors will see the 20+ year maturity and conclude it is too long. However, SBA DCPCs do factor down though, similar to MBS, over time. If we consider where the universe of these bonds currently stands, you can see historically by the time a DCPC ages 7 years the remaining balance is around 45- 50% and by the time 10 years have elapsed, the remaining balance is approximately 20-25%.



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 (March) | Monthly, 5th business day

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


Vining Sparks: Strategic Insight: NY Legislature Passes Solution for Tough Legacy LIBOR Contracts

As the cessation of LIBOR approaches, this is a quick update on a piece of legislation suggested by the ARRC, passed by New York State, and awaiting the signature of Governor Cuomo. If signed, it will mark an important milestone in ensuring a smooth and orderly transition away from LIBOR. It should remove a great amount of uncertainty from certain loans and bonds governed by New York State law, which are many.


WSJ: Bond Bulls Charge Ahead, Challenging Consensus on Rising Yields

“For their part, Fed officials have pledged to be unusually patient about raising rates in the coming years. They have said that they want to see actual evidence that inflation can be sustained at their target rather than moving ahead of time, as they have in past economic expansions.”


Vining Sparks: Coronavirus Chartbook


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