Sector Update

September 20, 2021

The yield curve steepened for the fourth straight week last week. Yields moved up in the belly of the curve while they were unchanged or declined elsewhere. Maturities from 3- to 10-years moved up 2-4 bps. Shorter maturities were unchanged and longer, 20- and 30-year maturities, fell 1-4 bps. While yields largely ended the week higher, it wasn’t without volatility. Through Tuesday of last week, the 5-year was down 3 bps before moving higher through the end of the week. It was an impressive move, increasing nearly 11 bps from trough to peak.

Today – Yields give back all last week, curve flatter, equities turn even lower

Major equity indices ended the week lower (again), a move that has continued today as markets struggle to digest a number of events, both current and upcoming. Weighing heavily over the markets right now is the potential insolvency of China Evergrande Group, the largest property developer in China. More important than one specific company is any sort of contagion effect that could exist. One might think this may give the Fed pause when it comes to announcing tapering plans, potentially this Wednesday as their meeting concludes. However, New York Fed President William Dudley said this morning that the FOMC is “not going to react to small market moves and defer the tapering on that basis.”

This week seems to have all the ingredients for volatility. Outside the China Evergrande situation and FOMC meeting, still lurking around are the debt ceiling deadline and fiscal cliff, debate over the infrastructure bill, and what must be unwelcome if not untimely news for the FOMC regarding investment holdings of certain members. Even if everything is above board, and I have seen nothing to suggest otherwise, the public perception is poor. This is especially true when Powell is seeking renomination, yet another potential catalyst for volatility.

Curve ends week steeper

Yields on 5- and 10-year continued their grind higher last week

Yield Curve Shape – 2s-5s remains above 20-day MA, 4 bps steeper last week

Yield Curve Shape –2s-10s remains (barely) through 20-day Mov Avg, 2 bps steeper last week

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

Government/Agency Space
- Bullet spreads unchanged last week
- Callables largely tighter, 5-year maturities flat
  - 5-year and shorter unchanged to 2 bps tighter
  - Longer maturities 3-4 bps tighter
- Last week, issuance $5.5 Billion — $3.0 Billion called

Agency CMBS, MBS, and ARMs
- SBA DCPC spreads 2 bps tighter last week
  - Spreads are unchanged over the past month, 4 bps tighter YTD
  - Spreads on seasoned collateral can be higher, more premium risk though
  - Large SBIC auction last week was very well received
- SBA Floating 7(a) Pool speeds released (8/13)
  - - SBA 7(a) factors are delayed this month due to SBA technical issues, prepayment speeds will be available once factors are released
- Agency MBS spreads were wider, 15-year 2 bps wider and 30-year 1 bp wider
  - Freddie Mac PMMS shows mortgage rates -2 bps from prior week
  - 30-year rate at 2.86% (-2 bps from prior) | 15-year rate at 2.12 (-7 bps from prior)
    - YTD — 30-year is + 19 and 15-year is -5 bps
    - 30-year is +21 from all time low on 1/7/21 of 2.65
    - 15-year is +2 from all time low on 8/5/21 of 2.10
- Agency CMOs spreads unchanged from prior week
Municipals
- BQ Munis, 5-year 4 bps tighter, 10-year 2 bps tighter, 15-year unchanged
- GM Munis, 5-year 4 bps tighter, 10-year 2 bps tighter, 15-year unchanged
- Taxable Munis, 5-year 1 bp tighter, 10-year unchanged, 15-year unchanged

Corporates
- A-Rated Corporates – 2-year unchanged, 5-year 1 bp tighter, 10-year unchanged

Vining Sparks Interest Rate Products
- Desk activity focused on asset hedging
- Swapping longer, fixed-rate municipal bonds to floating is still popular
- In today’s commentary, we share an example of a recently executed strategy to deploy liquidity without taking excessive risk

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, 5^th business day

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

Bloomberg: Market Contagion Tests Xi’s Resolve on Evergrande, Property Curbs

“Authorities appear determined to push ahead with their campaign to deleverage as well as cool the property market. Guo Shuqing, the chief banking regulator, last year identified banks’ excessive exposure to the property market as the biggest risk facing the financial system. The challenge for officials is how far to go before their tough measures threaten to create the kind of financial instability that they are trying to avoid.”

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