Sector Update

May 3, 2021

Breaking a 3-week trend of declines, yields increased last week on maturities 5-years and longer and the curve steepened. The FOMC meeting last week was relatively uneventful. They reiterated patience in the face of an economy adding steam. As most expected, there was no news on tapering of asset purchases. Some hope for news at the June meeting, but that seems unlikely. Powell’s appearance at Jackson Hole in August is the next mostly likely time. There is a busy economic calendar this week providing further looks into the strengthening of the economy. Earlier this morning, yields were down 3-4 bps on weaker-than-expected construction (from March) and ISM Manufacturing data but have since recovered.

Bond Index Returns – April 2021

In large part, depository fixed-income investors will welcome April’s broad positive returns. February and March were mostly negative as spread tightening couldn’t overcome increases in benchmark yields. In April, all else equal, losses shrank, and gains increased. Frankly, I think many depositories would be okay with spreads widening and/or benchmark yields increasing even if it did affect some current holdings as it would further bolster their run-rate moving forward. As it stands, the Fed and a market awash with liquidity is likely to keep a lid on spreads for the time being.

A Few Points to Start Your Week

• Loan Trading webinar on May 11^th and 13^th, registration open, see Upcoming Webinars section
• Recently hosted a LIBOR Update webinar, replay available online – see below
• Agency CMO commentary contains summary trade data from April purchases

Recent Webinar: LIBOR Update, Are you Ready?

We recently hosted a webinar on the transition away from LIBOR. We now have more clarity on specifics like the SOFR/LIBOR spread adjustments and progress toward a fix for “tough legacy contracts”. While the market has come a long way since the initial announcement, there are still some unknowns. You can view the presentation and access the slides in our Webinar Archive.

Upcoming Webinars – (1 hour CPE available)

Bank 5/11: Balance Sheet Management and Your Loan Portfolio

Credit Union 5/13: Loan Participation Market Overview

Bank 6/15: Mortgage Market Update & Opportunities

Credit Union 6/17: Mortgage Market Update & Opportunities

Bank 6/24: 2^nd Quarter 2021 Bank Advisory Webinar

Today

Treasury yields are lower from Friday’s close after two weaker-than-expected economic reports this morning. ISM Manufacturing came in at 60.7 (65.0 expected) and Construction Spending came in at 0.2% (1.6% expected). Broad U.S. equity indices remain positive this morning except for the NASDAQ.

Equity Index Performance YTD

Long and intermediate yields decline increased, short yields unchanged

10- and 5-year yields within 25 and 83 bps from start of 2020 – up 71 and 49 bps YTD respectively

Yield Curve Shape – 2s-5s and 2s-10s still steep, even after recent pullbacks

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

• Government/Agency Space
  • Bullet spreads unchanged for the week
    • Bullet spreads appear to have found their floor
    • Essentially 0 to 5 bps moving from shorter to longer maturities
    • Have held constant for past month
  • Callables tighter
    • 5-year and in maturities, 1-2 bps tighter
    • > 5-year maturities, 2-5 bps tighter
  • Last week, issuance $10.8 Billion — $3.6 Billion called

• Agency CMBS, MBS, and ARMs
  • SBA DCPCs were 4 bps tighter on the week
    • Spreads on seasoned collateral can be higher, more premium risk though
    • The May DCPC auction this week likely to see strong interest again
  • SBA Floating 7(a) Pool speeds for March released
    • Speeds increased slightly for equipment and real-estate
    • Growing optimism mixed with seasonal factors could indicate higher speeds in months ahead
  • Agency MBS spreads mixed 15-year 2 bps tighter and 30-year 5 bps tighter
    • Freddie Mac PMMS shows mortgage rates remain below 3%
    • 30-year rate at 2.98 (+1 bp from prior) | 15-year rate at 2.31 (+2 bps from prior)
      • YTD — 30-year is + 31 and 15-year is +14
    • Prepayment speeds released later this week; market expects slower
  • Agency CMOs spreads were 2 bps tighter for the week
    • Spreads currently 1-4 bps wider for the year
    • Cut-down coupons continue to drive activity
    • April trade summary data available this week

• Municipals
  • BQ Munis, 5-year 3 bps tighter, 10-year 7 bps tighter, 15-year 6 bps tighter
  • GM Munis, 5-year 3 bps tighter, 10-year 7 bps tighter, 15-year 7 bps tighter
  • Taxable Munis, 5-year 1 bp wider, 10-year 3 bps tighter, 15-year 15 bps wider

• Corporates – spreads hardly budge
  • A-Rated Corporates – 2-year 1 bp tighter, 5-year unchanged, 10-year 1 bp wider

• Vining Sparks Interest Rate Products
  • Commercial borrowers and portfolio hedging drove activity last week
  • Both are looking for rising rate protection
  • Portfolio hedgers are creating their own “DIY floater”, full writeup has more detail
  • Now include both Prime- and LIBOR-based pricing matrixes

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 (April) | Monthly, 5^th business day

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

WSJ Saturday Essay: How a More Resilient America Beat a Midcentury Pandemic

“A striking contrast between 1957 and the present is that Americans today appear to have a much lower tolerance for risk than their grandparents and great-grandparents.”

WSJ: Americans Can’t Get Enough of the Stock Market

“Individual investors are holding more stocks than ever before as major indexes climb to fresh highs. They are also upping the ante by borrowing to magnify their bets or increasingly buying on small dips in the market”

Vining Sparks: Coronavirus Chartbook