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


WSJ: Top Fed Official Says Continued High Inflation Would Be Problematic for Central Bank

“The Fed official said most of his colleagues who participate in rate-setting meetings believe the risks right now are tilted to higher-than-anticipated inflation outcomes.”


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


INTENDED FOR INSTITUTIONAL INVESTORS ONLY.
The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
Copyright © 2022
Member FINRA/SIPC
This is a publication of Vining-Sparks IBG, LLC
775 Ridge Lake Blvd., Memphis, TN 38120