Sector Update

November 22, 2021

After two weeks featuring a volatile whipsaw move in Treasury yields, last week was rather boring when looking from beginning to end. Yields ended the week plus/minus 1-2 bps on maturities 3-years and longer. That doesn’t tell the whole story though. On Monday and Tuesday, yields continued the prior week’s move higher and the curve steepened. Yields turned downward on Wednesday though and continued throughout the week. This change in direction was largely a function of markets (again) struggling to digest a surge of COVID-19 cases in Europe. There was a big push down in yields on Friday as Austria announced a new lockdown and vaccine mandate. Germany also said it may take similar measures. In the meantime, inflation is seemingly ever-present and Fed officials aren’t silent on the issue. Complicating matters further was that, until this morning, it was still undecided who exactly would be the next Fed Chair.

This morning yields bounced higher on news Fed Chair Powell will be renominated for a second term. The bounce higher in yields shows just how much potential uncertainty there was around this event. For a holiday-shortened week, there is plenty of economic news (most on Wednesday) that could introduce volatility around the Thanksgiving holiday. The bond market will be closed Thursday and will have limited hours on Friday with a 2:00 pm (Eastern) early close.

Today – Yields higher in a nearly parallel move, equities largely positive

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, relatively unchanged for at least the past two months
  • Callable spreads mixed
    • 5-year and shorter unchanged to 4 bps tighter
    • Longer maturities unchanged to 1 bp wider
  • Last week, issuance $1.6 Billion — $105 Million called

• Agency CMBS, MBS, and ARMs
  • SBA DCPC spread 1 bp tighter last week
    • Spreads have been relatively stable over the past
    • Spreads on seasoned collateral can be higher, more premium risk though
      
      
  • SBA Floating 7(a) Pool factors recently released and prepay speeds are available
    • 16% of NFIB respondents list inflation as their single most important problem
    • 49% still have job openings they are unable to fill, a slight improvement from previous at 51%
      
      
  • Agency MBS spreads were mixed, 15-year 4 bps wider and 30-year 1 bp tighter
    • Freddie Mac PMMS shows mortgage rates declined
    • 30-year rate at 3.10% (+12 bps from prior) | 15-year rate at 2.39 (+12 bps from prior)
      • YTD — 30-year is + 43 and 15-year is +22 bps
      • 30-year is +45 from all time low on 1/7/21 of 2.65
      • 15-year is +29 from all time low on 8/5/21 of 2.10
        
        
  • Agency CMOs spreads were 2 bps tighter across the stack
    
    
• Municipals – spreads wider for the week
  • BQ Munis, 5-year 7 bps wider, 10-year 8 bps wider, 15-year 6 bps wider
  • GM Munis, 5-year 7 bps wider, 10-year 1 bp wider, 15-year unchanged
  • Taxable Munis, 5-year 5 bps wider, 10-year 3 bps wider, 15-year 13 bps wider

• Corporates
  • A-Rated Corporates – 2-year 5 bps wider, 5-year 3 bps wider, 10-year 3 bps wider

• Vining Sparks Interest Rate Products
  • Volatility declined last week as rates closed down slightly across a flattening curve
  • Markets weighing Fed tightening against possibility of new COVID-19 outbreak like in Europe
  • Portfolio hedgers very active with most creating their own floating-rate munis
  • See full commentary this week for 10 Thanksgiving trivia questions

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 (November) | Monthly, 10^th business day

WSJ: Biden Will Tap Jerome Powell for New Term as Fed Chairman

“The president’s decision reflected a desire by Mr. Biden to maintain stability at the central bank amid public concerns about high prices for everything from groceries to fuel, administration officials said. Mr. Biden’s aides said they want to focus much of their attention on passage of their social spending and climate legislation and believe Mr. Powell will more easily win confirmation.”

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