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

• Government/Agency Space
  • Bullet spreads unchanged last week
  • Callables largely tighter
    • 5-year and shorter unchanged to 1-3 bps tighter
    • Longer maturities unchanged

• Agency CMBS, MBS, and ARMs
  • SBA DCPC spread 4 bps tighter last week
    • Spreads are 7 bps tighter over the past month, 9 bps tighter YTD
      
      
  • Agency MBS spreads were tighter, 15-year 3 bps tighter and 30-year 5 bps tighter
    • Freddie Mac PMMS shows mortgage rates moved slightly lower
    • 30-year rate at 2.99% (-2 bps from prior) | 15-year rate at 2.23 (-5 bps from prior)
      • YTD — 30-year is + 32 and 15-year is +6 bps
      • 30-year is +34 from all time low on 1/7/21 of 2.65
      • 15-year is +13 from all time low on 8/5/21 of 2.10
        
        
  • Agency CMOs spreads unchanged
    
    
• Municipals
  • BQ Munis, 5-year 13 bps tighter, 10-year 9 bps tighter, 15-year 9 bps tighter
  • GM Munis, 5-year 7 bps tighter, 10-year 8 bps tighter, 15-year 9 bps tighter
  • Taxable Munis, 5-year 8 bps tighter, 10-year 11 bps tighter, 15-year 1 bp tighter

• Corporates
  • A-Rated Corporates – 2-year 2 bps wider, 5-year unchanged, 10-year 3 bps wider

• Vining Sparks Interest Rate Products
  • Desk activity still focused on bond portfolio hedging, commercial loan hedging picking up
  • Challenges to most banks are well known and discussed at every conference we attend
  • Recent higher, and steeper, yield curve allows for asset sensitive banks to monetize their asset sensitivity now rather than waiting for the Fed to increase rates at some point in the future

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, 5^th business day

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

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