Sector Update

March 8, 2021

For the fifth straight week, the Treasury curve ended the week steeper with intermediate and longer yields increasing. The week did not seem as volatile as the prior but yields still saw large increases. I previously wrote that 5- to 7-year maturities would be interesting to watch because if prior increases were some sort of a “technical mishap” from a bad Treasury auction or any other number of potential reasons put forward, we could see yields retreat. That certainly wasn’t the case last week and with the likely approval of more stimulus, an improving jobs situation, and as vaccinations start to take hold it seems more like a fundamental shift in expectations. For a reference point, the 10-year Treasury yield is within 31 bps of where it began 2020.

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 +21 bps over the last two weeks to 3.02 according to the Freddie Mac PMMS. As we have discussed in the Prepay Commentary it takes time for these to work through though. We had a fresh look Friday (3/5) after the most recent data was released and prepays broadly increased for the measurement window.

Don’t Fear the Steeper – Week 5

Make sure to check out the visuals below but, save the short-end, there is quite the five-week run up going on in yields. 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 said this last week, but I think it is still relevant this week. This sentiment is reflected, partly, in the NASDAQ CBNK Index posting a 6.3% increase last week while broad indices were mixed. Depository activity was robust last week as large amounts of liquidity still exists in the banking system and recent yields make putting it to work more palatable.

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

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

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

Today

Treasury yields are up from Friday’s close, more so in the intermediate portion than the long/short ends of the curve. Broad U.S. equity indices are up, but the NASDAQ is struggling to start the week. The NASDAQ Bank Index (CBNK) continues its climb (up 2.9% today) after a 6.3% increase last week. With so much liquidity in the banking system, higher yields and a steeper yield curve should help bolster earnings moving forward.

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

10-year yield within 31 bps of where it started 2020, 5-year still off by 88 bps

Yield Curve Shape – Don’t Fear the Steeper

Food for Thought – 30-Year GNMA Jumbo 2.5s of 2020

The table below consists of substantially every 30-year GNMA Jumbo 2.50 that is in the 2020 vintage. There are a couple interesting takeaways. First, there has been a large and steep ramp in these pools as borrowers refinance. Just compare the loan age with the monthly CPRs. Second, once a pool hits a “terminal” speed, they have slowed down some, but not enough to matter to most and speeds can remain elevated for some time.

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

• Government/Agency Space
  • Bullet spreads unchanged on the week
    • Yields higher, spreads historically tight
    • Some considering Treasurys with spreads so tight
  • Callables 1-2 bps tighter
    • Discount callables in secondary market have interesting return profiles
  • Last week, issuance $4.7 Billion — $2.4 Billion called

• Agency CMBS, MBS, and ARMs
  • SBA DCPCs were unchanged on the week
    • Spreads on seasoned collateral can be higher, more premium risk though
    • Monthly fixed-rate DCPC auction is this week (20- and 25-year maturities)
    • Semi-annual SBIC auction expected in the next two weeks
  • SBA Floating 7(a) Pool speeds scheduled for Friday (3/12) release
  • Agency MBS spreads tighter 15-year 4 bps and 30-year 5 bps tighter
    • Freddie Mac PMMS shows mortgage rates increased
    • 30-year rate at 3.02 (+5 bps from last week) | 15-year rate at 2.34 (unchanged from last week)
  • Agency CMOs spreads were unchanged for the week
    • Cut-coupon CMOs popularity (especially sub 1% cuts) may wane if rates remain here

• Municipals
  • BQ Munis, 5-year 6 bps tighter, 10-year 29 bps tighter, 15-year 30 bps tighter
  • GM Munis, 5-year 7 bps tighter, 10-year 16 bps tighter, 15-year 18 bps tighter
  • Taxable Munis, 5-year 4 bps wider , 10-year 1 bp sider, 15-year 3 bps wider

• Corporates – spreads wider for the week
  • A-Rated Corporates – 2-year 3 bps tighter, 5-year 5 bps tighter, 10-year 7 bps tighter

• Vining Sparks Interest Rate Products
  • Desk activity has picked up, borrowers locking 10-year loans above 4%
  • Borrowers realizing that, even with the run-up, rates still historically low
  • For instance, all-time low in 10-year swap rate is “only” 30 bps lower from where we are now
  • Interest rate swaps can help banks flourish in quickly changing market conditions while continuing to offer customers the products they desire

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, 5^th business day

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

WSJ: Treasury Yields Jump Again on Covid-19 Stimulus, Jobs

“Investors are having trouble adjusting to this new policy framework. There is confusion about where yields will settle and some skepticism that the Fed will stick to its low rates and bond-buying program.”

Vining Sparks: Coronavirus Chartbook