Sector Update

October 12, 2021

This week’s Sector Update is abbreviated due to the holiday-shortened week.

For the most part, yields marched steadily higher last week and 2- through 5- year maturities closed out the week at yearly highs. Portfolio managers have certainly taken notice as quarter-end activities began to wrap up for many last week.

Something interesting happened Friday morning which I think is a good example of the dichotomy market participants face when considering employment and inflation. You can see this in the chart below. At first blush, payroll growth disappointed Friday coming in much weaker than expected. A knee-jerk reaction might have been that this could put tapering on hold. However, there is no doubt about the shortage of labor, if your own observations aren’t enough, this morning’s JOLTS report confirms this. The inflationary pressures this has, and could continue, to cause is more squarely where the Fed sees the highest risk to their forecast. This appears to be where markets ended up as yields rebounded after the release and closed even higher on Friday.

Almost as if in response, or in affirmation, this morning Fed Vice Chairman Richard Clarida seems to have removed the balance of any doubt that the Fed wouldn’t announce plans to taper in their upcoming November meeting. Also today, Raphael Bostic, President of the Atlanta Federal Reserve Bank, said that “If highly accommodative monetary policy is meant to correct past inflation shortfalls, then we have accomplished that mission”.

Today – Curve flatter as short/intermediate yields rise, equities still largely down from Friday’s close

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

Sector Commentary

What We’re Reading

Market Today | Daily

Weekly Recap | Weekly, Friday

Brokered Deposit Rate Indications | Weekly, Monday

Investment Alternatives Matrix | Weekly, Tuesday

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

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

CNBC: Strong wage gains cast doubt that inflation is going away anytime soon

“Excluding a brief spike in 2020, that’s the fastest annual pace since the Bureau of Labor Statistics started tracking the measure in March 2007. It’s also the third month in a row that the annual rise has been more than 4% and comes amid a tightening labor market and inflation that has been more persistent than many experts have expected.”

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

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