Sector Update

October 4, 2021

Written here in this exact same space last Monday: “Last week had all the ingredients for volatility and it didn’t fail to deliver.”  I couldn’t have said it much better myself in trying to describe the market moves only one week later.  That same volatility only gained further momentum, but in the opposite direction.  The Evergrande story in China had nearly every market participant feeling some market jitters, particularly given the Lehman-like echoes and general fear of another GFC-type event. 

The flight-to-quality trade meant lots of dollars flowing into safety assets like government bonds and notes.  The S&P 500 declined and even pushed below the (technically speaking) “up-and-to-the-right” trading pattern that it has held since last Oct/Nov. To further put it in perspective, Treasurys failed to muster a strong enough bid to push the 10-year much below 1.50% (we’re at 1.504% as of this writing).  In other words, nothing that even resembles the 100+ basis point decline in yields when the “novel coronavirus” news upended the financial markets last year.

U.S. 10-Year Daily Candlestick Chart

S&P 500 Daily Candlestick Chart

Expanding on how bond yields moved last week, Treasurys rallied hard after finally selling off a bit.  Of course, bond yields moving lower last week only happened after the market had a bit of time to digest the moves made by the FOMC the week before.  To sum up, the Fed moved their “dots” higher and sooner, and it was perhaps a bit sooner than maybe was anticipated.  The dot plot shows a spilt committee with 50/50 odds of the next rate hike in 2022.  So, this “hawkish” Fed meeting that concluded the Wednesday prior set the stage for the data-heavy week that we saw last week.

At this stage, portfolio managers (not just bonds, one could say the same for equity PMs) would be imprudent to forget the big picture.  The story hasn’t changed—the Fed still “has your back,” corporate and household balance sheets are stronger than they have been in living memory (thanks to a super accommodative Fed + stimulative Congress), and people are bullish on the future.  Another thing to keep in mind—Delta variant aside, emerging from this pandemic should be something akin to a “post-war boom,” economically speaking.  It could even be like nothing seen since the roaring ’20s—think post-1918 Spanish flu.  As the saying goes, history doesn’t repeat but it does often rhyme.  Sure, inflation is perhaps beginning to rear its ugly head, but in my opinion the Fed hit the reset button on our stubbornly low inflation picture given the events of the past 18 months.

Also, from a technical standpoint, it is difficult to not look at the charts and think that bonds had been way overbought, and in the last 2 weeks got a bit oversold.  If you haven’t noticed, not mentioned above was a single economic data release.  Have a good week everyone.

Today – Yields mostly unchanged, curve steeper, equities mixed

As the third quarter ends, this week has plenty of economic news on tap along with several FOMC members scheduled to speak. Usually, quarter-ends tend to be a quieter period of activity. This week may be an exception though. Yields are at levels not seen since June and even then, they were fleeting. I expect some will remember this and will make time at quarter end to take a closer look at what’s available.

Yield Curve Shape – 2s-5s 2 bps flatter last week as 3- to 5-year yields declined

Yield Curve Shape –2s-10s spiked through 20-day Mov Avg, 1 bp steeper last week

Sector Commentary (click on links for more in-depth look)

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 (September) | Monthly, 5th business day

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

WSJ: Broader Inflation Pressures Begin to Show

“Inflation as measured by the Labor Department’s consumer-price index was 5.3% in the 12 months through August, close to the highest in 12 years. Economists generally expect that to fall, but disagree on how much. They attribute much of the recent surge in prices to temporary causes-such as a post-vaccine spending upsurge, specific supply-chain problems and other production bottlenecks-that should fade as businesses ramp up output. But a key question is whether prices will continue to rise more persistently once these temporary disruptions end.”

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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