Sector Update

May 24, 2021

In a week filled with headlines about major selloffs in cryptocurrency markets, which appeared to put downward pressure on equities, U.S. Treasury yields held steady. The 10-year yield dipped by a basis point but the curve was practically unchanged on the week. Recent market moves have only reinforced the notion that bond yields seem to be firmly entrenched within their recent trading ranges.  As highlighted in the chart below, the 5-year yield spiked higher on the surprisingly firm CPI print on May 12th, only to reverse course in the days immediately following. Nearly the same move occurred last week, with the 5-year popping higher after the FOMC meeting minutes showed that the topic of tapering asset purchases by the FOMC was at least discussed in the April meeting, only for yields to return to pre-release levels the next day.  Lately, whenever yields move towards the top of the recent trading range (5s between ~75-85 bps and 10s between ~155-170 bps), Treasury buyers swoop in and push yields lower.  And despite the market’s fears over hotter inflation, the 10-year has yet to break the 1.74% year-to-date high set on March 31st. Arguably the biggest economic release set for this week is the April PCE inflation reading on Friday, which the market expects to increase from 1.8% to 2.9%.  It will be interesting to see what happens with bond yields should the numbers come out firmer than expected.  Would a 3.0%+ reading be enough to move yields meaningfully higher? With the PCE release coming on a holiday-shortened Friday trading session, and with the Memorial Day holiday on Monday, bond investors may have to wait until mid-week next week to see if any selloff in Treasurys holds for much more than a business day or two.

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Treasury yields are marginally lower from Friday’s close, with the 10-year down 2 basis points to 1.60%.  U.S. equity indices are mixed so far this morning, with the NASDAQ higher but the Dow and S&P 500 lower to start the week. The economic calendar is quite full this week, front-loaded with numerous Fed members scheduled to speak, and with housing, consumer confidence, and initial claims throughout the week before the big inflation numbers Friday. 

Yields end week virtually unchanged

10- and 5-year yields within 26 and 86 bps from start of 2020 – up 71 and 46 bps YTD respectively, rangebound

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: U.S. Home Prices Push to Record High, Slowing Pace of Purchases

“The forces driving home sales haven’t gone away. Low mortgage rates and the rise of remote work, which sent buyers scrambling to find larger living spaces, are still spurring demand. […] But a deficit of homes for sale relative to intense demand and vertiginous housing prices have started easing the pace of sales. The median existing-home price rose to $341,600 in April, the highest on record, NAR said. The annual price appreciation of more than 19% was the strongest in data going back to 1999.”

WSJ: Government Bond Yields Fall as Investors Grapple With Muddied Economic Picture

“In the U.S., inflation readings have been strong and the minutes of the last Fed meeting released Wednesday showed there had been some discussion about slowing bond purchases—also known as taper talk. At the same time, housing starts disappointed on Tuesday, while the University of Michigan consumer-sentiment survey disappointed late last week. Mark Cabana, U.S. rates strategist at Bank of America, still expects U.S. rates to rise further especially if there is a strong reading for the Fed’s preferred measure of inflation, personal consumption expenditures, due out [this] Friday.”

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