Sector Update

November 8, 2021

Yield declines last week seemed a bit overdone to me considering, in my view, what happened. The 10-year matched its single largest weekly decline of this year and the 2-, 3-, and 5-year all had their single largest weekly declines of the year (charts below). The week started with ISM reports that continued to highlight supply chain issues which continue to pressure inflation higher. On Wednesday, prior to the Fed announcement, the ADP Employment Change came in stronger than expected. Then, later in the day, the Fed announced, as expected, they would begin tapering asset purchases. They also fine-tuned some of their wording regarding inflation noting it was elevated due to factors “…that are expected to be transitory.”

At this point, yields were largely up for the week and the curve steeper. This all changed on Thursday after the Bank of England refused, in a 7-2 vote, to increase rates by just 15 bps. This surprised markets and perhaps made some reconsider their previous “pull forward” of when they expected the Fed to raise short-term rates (chart below). On Friday, Treasury yields continued to fall even after a good jobs report which also featured positive revisions to prior months. The participation rate remains low though and data seems to still indicate toward an increasingly tighter labor market.

In the end, the curve finished the week slightly flatter. In terms of yields, it is worth keeping things in perspective. Even after declines, 2-7 year maturities, which are also back up 4-5 bps so far today, still remain close to recent highs (charts below). Yields have pushed higher today. Perhaps, in part, due to the passage of an infrastructure deal, but I think more in response to comments from Fed officials, like Richard Clarida. The inflation readings we get this Wednesday will be very important and there is some potential for volatility around the announcement.

Today – Yields higher 4-5 bps in belly of curve, shape largely unchanged, equities higher

Yields on 2-, 3-, and 5-year maturities still near highs for 2021

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

What We’re Reading

Market Today | Daily

Weekly Recap | Weekly, Friday

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

Brokered Deposit Rate Indications | Weekly, Monday

Investment Alternatives Matrix | Weekly, Tuesday

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

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

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