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)
- Government/Agency Space
- Bullet spreads unchanged last week
- Callable spreads wider for second week
- 5-year and shorter 1-2 bps wider
- Longer maturities 5bps wider
- Last week, issuance $2.9 Billion — $367 Million called
- Agency CMBS, MBS, and ARMs
- SBA DCPC spread 2 bps wider for the week
- Spreads are flat 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 later 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 6 bps tighter and 30-year 6 bps tighter
- Freddie Mac PMMS shows mortgage rates moved higher
- 30-year rate at 3.09% (-5 bps from prior) | 15-year rate at 2.35 (-2 bps from prior)
- YTD — 30-year is + 42 and 15-year is +18 bps
- 30-year is +44 from all time low on 1/7/21 of 2.65
- 15-year is +25 from all time low on 8/5/21 of 2.10
- Agency CMOs spreads unchanged across the stack
- SBA DCPC spread 2 bps wider for the week
- Municipals – spreads widen nearly universally for the second week in a row
- BQ Munis, 5-year 1 bp wider, 10-year 3 bps wider, 15-year 3 bps tighter
- GM Munis, 5-year 7 bps wider, 10-year 11 bps wider, 15-year 10 bps wider
- Taxable Munis, 5-year 4 bps wider, 10-year 4 bps tighter, 15-year 4 bps tighter
- A-Rated Corporates – 2-year 3 bps wider, 5-year 7 bps wider, 10-year 6 bps wider
- Vining Sparks Interest Rate Products
- Global central banks surprised markets with comments/actions more dovish than expected
- Uptick in loan hedging indications points towards signs of life in the commercial loan market
- Virtually all commercial loan hedging deals are now priced using SOFR, FF Effective, or Prime
- See full commentary this week for ways to win business using derivatives and control risk
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
“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.
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.