Sector Update | ![]() |
October 18, 2021
For most of last week, yields moved in a bear-flattening fashion. That is, shorter-term yields moved higher while longer maturity yields fell. From a high level, it makes sense for this to have occurred. Coming into last week, inflationary pressures were already on the mind of many; notably, Federal Reserve officials who were plenty vocal. The Federal Reserve can’t afford to lose control of the inflation narrative and they were out in full force last week. Below is a sample of comments from last week compiled by our Economics team.
Richard Clarida – “I continue to believe that the underlying rate of inflation in the U.S. economy is hovering close to our 2% longer-run objective” and that “once these relative price adjustments are complete and bottlenecks have unclogged,” the unusually strong inflation pressures will “prove to be largely transitory.” However, “the risks to inflation are to the upside.”
Raphael Bostic – “It is becoming increasingly clear that the feature of this episode that has animated price pressures – mainly the intense and widespread supply-chain disruptions – will not be brief. …By this definition, then, the forces are not transitory.”
James Bullard — supports a quicker tapering process than the consensus “because I want to be in a position to react to possible upside risks to inflation.” “There’s no reason for us to commit one way or another at this point,” Bullard went on, adding, “I just want to be in a position in case we have to move sooner that we’re able to do so next year in the spring or summer if we have to do so.”
Thomas Barkin — said that current inflation pressures “look more broad-based,” and “Because the risks are elevated, it seems like a sensible time to have the conversation about tapering.” However, there is less clarity on the rate path. “We still have a lot to learn about whether recent inflation levels will be sustained and how much room we have…in the labor market until we get to maximum employment,” Barkin said, addressing the forward guidance for rate hikes. “I do think…there is going to be a return to the labor force, and that is part of why…I am willing to be a little bit more patient,” he noted.
The struggle isn’t new, markets have been coping with transitory versus more sustained inflation pressures for some time now. A Bloomberg article, Team Persistent Tops Team Transitory in Latest Inflation Debate, summed it up well as the title says it all. It will be interesting to see if Federal Reserve speakers this week attempt to calm markets about tapering and future monetary policy plans.
From a practical perspective, what might this indicate for portfolio managers? If (and this isn’t a small if), a longer-term flattening trend emerges – a barbell approach to purchases, rather than a typical ladder, could be beneficial if the Fed raises short-term rates sooner than later which in turn could moot any increases in longer term yields as inflationary pressures subside and growth prospects potentially dim.
Today – Curve marginally steeper, stocks higher
Yields on 2-, 3-, and 5-year maturities at highs for 2021
Sector Commentary (click on links for more in-depth look)
- Government/Agency Space
- Bullet spreads unchanged last week
- Callable spreads mixed
- 5-year and shorter unchanged to 1-2 bps tighter
- Longer maturities unchanged to 4 bps wider
- Last week, issuance $3.3 Billion — $742 Million called
- Agency CMBS, MBS, and ARMs
- SBA DCPC spread 4 bps tighter last week
- Spreads are 9 bps tighter over the past month, 13 bps tighter YTD
- Spreads on seasoned collateral can be higher, more premium risk though
- SBA Floating 7(a) Pool factor release delayed
- SBA 7(a) factors are delayed this month due to SBA technical issues, updated prepayment speeds will be available once factors are released
- SBA 7(a) factors are delayed this month due to SBA technical issues, updated prepayment speeds will be available once factors are released
- Agency MBS spreads were tighter, 15-year 6 bps tighter and 30-year 3 bps tighter
- Freddie Mac PMMS shows mortgage rates moved higher
- 30-year rate at 3.05% (+6 bps from prior) | 15-year rate at 2.30 (+7 bps from prior)
- YTD — 30-year is + 38 and 15-year is +13 bps
- 30-year is +40 from all time low on 1/7/21 of 2.65
- 15-year is +20 from all time low on 8/5/21 of 2.10
- Agency CMOs spreads 2 bps tighter across the stack
- SBA DCPC spread 4 bps tighter last week
- Municipals longer maturities keeping better pace with rally
- BQ Munis, 5-year 6 bps tighter, 10-year 11 bps wider, 15-year 10 bps wider
- GM Munis, 5-year 7 bps tighter, 10-year 4 bps wider, 15-year 9 bps wider
- Taxable Munis, 5-year unchanged, 10-year 5 bps wider, 15-year 8 bps wider
- Corporates
- A-Rated Corporates – 2-year 4 bps wider, 5-year unchanged, 10-year 3 bps wider
- Vining Sparks Interest Rate Products
- Swap rates moved lower most of the week before rebounding Friday
- Desk activity still focused on bond portfolio hedging
- Those worried about potential price depreciation associated with long-duration bonds continue to use swaps on new and existing positions
- Reminder, December 31, 2021 is the drop-dead date for new LIBOR-based transactions
- LIBOR rates will continue to be published until June 30, 2023 to provide time for legacy transactions
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 (September) | Monthly, 10th business day
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