Sector Update

May 17, 2021

Yields ended last week higher, peaking on Wednesday, then trading lower on Thursday and Friday. Prior to the CPI release on Wednesday, the 5- and 10-year were already 2 and 4 bps higher, respectively. In the wake of the higher-than-expected CPI release, their yields traded as high as 0.86 and 1.70. It’s interesting, when looking back two-weeks, the immediate reaction to 5-year Treasury yields were almost mirror opposites on the weaker jobs report and stronger CPI reading.

As the week wore on, yields declined as markets digested what portions of the CPI release were transitory and which were more likely sticky. Transitory is in the eye of the beholder though, auto prices are a great example. Most would agree prices will eventually moderate; however, how long it takes matters. If a consumer can’t defer a purchase, that inflation, transitory as it may be, is a real consequence to them and will influence their expectations. Managing inflation expectations is critical for the Fed so it was no surprise to hear Fed Vice Chair Clarida say they will “not hesitate to act” if this inflation isn’t transitory.

A Couple Points to Start Your Week

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Treasury yields are up slightly from Friday’s close. Broad U.S. equity indices are negative this morning after a rough ride last week. For some perspective, on Wednesday of last week (5/12) the Dow Jones, S&P 500, and NASDAQ were -3.4%, -4.0, and -5.2% for the week before rebounding to close out the week. Economic data is light this week so perhaps markets will be less volatile than prior.

Yields end week moderately higher, remain within recent ranges

10- and 5-year yields within 25 and 87 bps from start of 2020 – up 71 and 45 bps YTD respectively

Yield Curve Shape – 2s-5s and 2s-10s still relatively steep, remain within recent ranges

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 (May) | Monthly, 5th business day

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

WSJ: Even Short-Term Inflation Will Test the Fed

“So long as the Fed expects inflation to come back down and investors and workers have faith, it is under no pressure to move. The danger is that high inflation shakes that faith.”

Vining Sparks: Coronavirus Chartbook

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