Sector Update

October 25, 2021

For most of last week, yields moved in a bear steepener fashion. That is, longer-term yields moved higher while shorter maturities lagged or declined. This can be indicative of greater-than-expected inflationary pressures. This changed on Thursday as data pushed yields, measured cumulatively for the week, to a nearly parallel move on maturities greater than 3-years.

As we wrote last week, inflation concerns were already on the mind of many, including the Federal Reserve, who can’t afford to lose control of the inflation narrative. On Friday, the upward momentum in yields (see charts below) seemed to downshift as Fed Chair Powell said, “The risks are clearly now to longer and more-persistent bottlenecks, and thus to higher inflation.” One might think this would send yields higher; however, the acknowledgment of the issue along with assuring markets they’d use their tools to “guide” inflation down if it looked more persistent than transitory, sent yields down for the day.

Like last week (because trends aren’t established in a week), what might this indicate from a practical perspective to a portfolio manager? 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 – Yields fall slightly, 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
    • Longer maturities unchanged to 2 bps tighter
  • Last week, issuance $3.2 Billion — $340 Million called

• Agency CMBS, MBS, and ARMs
  • SBA DCPC spread 2 bps wider last week
    • Spreads are 10 bps tighter over the past month, 11 bps tighter YTD
    • Spreads on seasoned collateral can be higher, more premium risk though
      
      
  • SBA Floating 7(a) Pool factors released (finally)
    • Equipment loan pool speeds decreased for first time since March
    • Real estate pools rose for the sixth time in seven months
    • 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 4 bps tighter and 30-year 4 bps tighter
    • Freddie Mac PMMS shows mortgage rates moved higher
      • 30-year rate at 3.09% (+4 bps from prior) | 15-year rate at 2.33 (+3 bps from prior)
      • YTD — 30-year is + 42 and 15-year is +16 bps
      • 30-year is +44 from all time low on 1/7/21 of 2.65
      • 15-year is +23 from all time low on 8/5/21 of 2.10
        
        
  • Agency CMOs spreads 2 bps tighter across the stack
    
    
• Municipals – longer maturities keeping better pace with increase in Treasury yields
  • BQ Munis, 5-year 1 bp tighter, 10-year unchanged, 15-year 1 bp tighter
  • GM Munis, 5-year 7 bps tighter, 10-year 6 bps tighter, 15-year 5 bps tighter
  • Taxable Munis, 5-year 7 bps tighter, 10-year 2 bps wider, 15-year 1 bp wider

• Corporates
  • A-Rated Corporates – 2-year 5 bps tighter, 5-year 2 bps tighter, 10-year 5 bps tighter

• Vining Sparks Interest Rate Products
  • Rate volatility increased again last week with Fed speakers sending a more hawkish signal to markets
  • 10-year swap rate traded in a 15 bps range, closed in the middle
  • Looking back reminds us of how quickly rates can change – what are ways to help improve future earnings?
    • Swapping long-term fixed rate securities to floating
    • Interest rate caps can serve as a good insurance policy, with a cap maximum cost is known
    • Can convert floating-rate loans to fixed
    • Forward starting swaps in conjunction with construction loans and associated funding

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 (October) | Monthly, 10^th business day

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