Sector Update

November 15, 2021

If I had to sum last week up in one word, it would be “inflation”. In this last publication, I opined that yield declines seemed a bit overdone, in my view, considering ongoing inflationary pressures. The bond market seemingly came to the same conclusion aided by the CPI release on Wednesday, a 31-year high. Inflation was broad based and higher than expected. You can find more coverage of that in the economic team’s Market Watch video.

Yields moved sharply upward reversing the prior week’s declines and, in most cases, pushed even higher. The 2-. 3-, and 5-year all had or matched their largest weekly move upwards of the year. The 10-year managed to completely reverse what was its single-largest weekly decline of this year. Words, mine at least, aren’t great at capturing the volatility so I’ve included several visuals below.

Today – Yields higher, curve steeper, equities largely negative

Activity was strong for a holiday-shortened week and especially so on Wednesday as yields moved markedly higher. Compared to the prior two weeks, this week is relatively quiet from an economic data standpoint. This week features a number of Fed speakers on Tuesday along with the October retail sales reports. Yields have continued to move higher this morning with the 2-5 year portion of the curve at/near highs for the year.

Yields on 2-, 3-, and 5-year maturities closed at weekly highs for 2021

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

• Government/Agency Space
  • Bullet spreads unchanged last week
  • Callable spreads wider for third week
    • 5-year and shorter unchanged to 1 bp wider
    • Longer maturities 9bps wider
  • Last week, issuance $1.6 Billion — $105 Million called

• Agency CMBS, MBS, and ARMs
  • SBA DCPC spread unchanged for the week
    • Spreads are 4 bps wider over the past month, 9 bps tighter YTD
    • Spreads on seasoned collateral can be higher, more premium risk though
      
      
  • SBA Floating 7(a) Pool factors due out this week, hopefully no delay this month
    • 51% of business owners have job openings unable to fill, topping 48-year highs
    • Quality and Cost of labor concerns highest since pandemic began
      
      
  • Agency MBS spreads were tighter, 15-year 3 bps tighter and 30-year 2 bps tighter
    • Freddie Mac PMMS shows mortgage rates declined
    • 30-year rate at 2.98% (-11 bps from prior) | 15-year rate at 2.27 (-8 bps from prior)
      • YTD — 30-year is + 31 and 15-year is +10 bps
      • 30-year is +33 from all time low on 1/7/21 of 2.65
      • 15-year is +17 from all time low on 8/5/21 of 2.10
        
        
  • Agency CMOs spreads unchanged across the stack
    
    
• Municipals – spreads tighter on Treasury selloff
  • BQ Munis, 5-year 10 bps tighter, 10-year 4 bps tighter, 15-year unchanged
  • GM Munis, 5-year 10 bps tighter, 10-year 11 bps tighter, 15-year 6 bps tighter
  • Taxable Munis, 5-year 3 bps tighter, 10-year 3 bps tighter, 15-year 6 bps tighter

• Corporates
  • A-Rated Corporates – 2-year unchanged, 5-year 7 bps tighter, 10-year 7 bps tighter

• Vining Sparks Interest Rate Products
  • Release of higher than expected CPI data and a terrible Treasury auction increased interest rate volatility
  • Loan hedging and creating floating rate munis continues to dominate activity
  • Virtually all commercial loan hedging deals are now priced using SOFR, FF Effective, or Prime
  • See full commentary for benefits of implementing a loan heading program

What We’re Reading

Market Today | Daily

Weekly Recap | Weekly, Friday

Monthly Review (October) | Monthly, 1^st business day

Brokered Deposit Rate Indications | Weekly, Monday

Investment Alternatives Matrix | Weekly, Tuesday

MBS Prepay Commentary (November) | Monthly, 5^th business day

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

WSJ: Market Bets on a Fed Interest-Rate Mistake

“Interest-rate futures are saying something different. They now imply the odds of the Fed raising its target range by at least a half point by the end of next year at 83%, according to CME Group calculations. Following the Fed’s September meeting, the odds of that happening were just 22%. Moreover, the futures now put the odds of the Fed raising rates by three-quarters of a point or more at 54%.”

Vining Sparks: Strategic Insight: Year-End Balance Sheet Management

As the end of 2021 approaches and planning for next year begins, we have developed several balance sheet and portfolio management strategies considering the current banking landscape and challenges that could weigh on future profitability. Additionally, we have updated our annual Year-End Checklist to help serve as a guide through the planning process.

Vining Sparks: Loan Trading: RV Market Analysis

Historically low interest rates, several rounds of stimulus, and pent-up travel demand all helped contribute to RV shipments ending 2020 with a 6% increase over 2019 and on par with the third best year ever despite shutdowns. Positive momentum has continued so far in 2021 setting new all-time highs in each of the last nine months.

Vining Sparks: Strategic Insight: Price Volatility on Tax-Free Municipal Bonds

Have you ever wondered why the price volatility you see on tax-free municipal bonds is less than comparable taxable bonds? At Vining Sparks, we consider taxes when measuring interest rate risk on tax-free municipal bonds. The rationale is simple: taxes matter. In this Strategic Insight, we look at the implications of ignoring taxes and why we think it makes sense to consider them.

Vining Sparks: MBS & Prepayment Update

This presentation looks back over 2021 and how different prepay models have performed so far this year. It is always important, but especially in this environment, that robust prepayment assumptions are used. We also make note that Yield Book is scheduled to release a model update and provide some background and comparisons.

Vining Sparks: Loan Trading: Auto Market Analysis

Auto loans continue to be a large part of our customers’ loan portfolios and a participation class that remains in favor. It is important to stay abreast of market changes in rates and potential credit concerns that may be creeping in that could impact production and performance.

Vining Sparks: Strategic Insight: New SBA 504 Debt Refinancing Program

The SBA recently published a rule implementing section 328 of the Economic Aid Act. Section 328, titled Low-Interest Refinancing, revises the requirements for refinancing debt with an SBA 504 Loan. The net effect of these revisions points towards greater ease and availability for certain borrowers, who were previously disallowed, to refinance using an SBA 504 loan.

Vining Sparks: Coronavirus Chartbook and Coronavirus State Charts