Sector Update

November 29, 2021

The Thanksgiving holiday split last week into two distinct periods. I like to think of it as BC (before cranberry) and AD (after dressing). As you can see in the table below, yields broadly increased Monday and Tuesday and were still positive when the market closed Wednesday. Prior to Thanksgiving, markets were already struggling to digest a surge of COVID-19 cases in Europe so it certainly came as a shock when the WHO named a variant of concern, “Omicron” on Friday.

The market reaction was pronounced and likely compounded by the short trading day and lightly staffed trading desks following the Holiday. Further down you can see markets have reversed some of the declines this morning. It helps symptoms are described as “extremely mild” by the South African doctor who spotted the variant. While cognizant of Omicron, I remain focused on fundamentals and am watching for more volatility this week around Fed speakers and further looks at inflation readings.

I wrote last week that inflation is seemingly ever-present; still, I doubt the Fed found this as interesting as I did. Last week, Dollar Tree, Inc. announced they are rolling out a $1.25 price point at all stores nationwide. To be fair, it would have had to happen at some point, but they managed for the past 35 year to maintain a $1.00 price point. They go on to say, “This decision is permanent and is not a reaction to short-term or transitory market conditions.”

Today – Yields higher in a steeper move, equities largely positive

Yields on 2-, 3-, and 5-year maturities remain near highs this morning after increasing from Friday’s close

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 largely unchanged
    • 5-year and shorter unchanged
    • Longer maturities 1 bp tighter
  • Last week, issuance $7.5 Billion — $210 Million called

• Agency CMBS, MBS, and ARMs
  • SBA DCPC spread 3 bp wider
    • 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 wider, 15-year 2 bps wider and 30-year 2 bps wider
    • Freddie Mac PMMS shows mortgage rates declined
    • 30-year rate at 3.10% (unch. from prior) | 15-year rate at 2.42 (+3 bps from prior)
      • YTD — 30-year is + 43 and 15-year is +25 bps
      • 30-year is +45 from all time low on 1/7/21 of 2.65
      • 15-year is +32 from all time low on 8/5/21 of 2.10
        
        
  • Agency CMOs spreads were 3 bps wider across the stack
    
    
• Municipals – spreads mixed
  • BQ Munis, 5-year 7 bps tighter, 10-year 6 bps tighter, 15-year 6 bps tighter
  • GM Munis, 5-year 6 bps wider, 10-year 7 bps wider, 15-year 6 bps wider
  • Taxable Munis, 5-year 2 bps tighter, 10-year 2 bps wider, 15-year 1 bp tighter

• Corporates
  • A-Rated Corporates – 2-year 2 bps tighter, 5-year 6 bps wider, 10-year 7 bps wider

• Vining Sparks Interest Rate Products
  • Volatility increased last week with the new COVID-19 variant announcement
  • Seeing more interest in loan hedging as borrowers express concerns about inflation
  • Portfolio hedgers still active with most creating their own floating-rate munis

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: Stocks Rise as Investors Weigh Omicron Variant

“Investors are awaiting more clarity on the transmissibility and severity of the Omicron variant and how well it can be contained by existing vaccines.”

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Vining Sparks: Coronavirus Chartbook and Coronavirus State Charts