Sector Update | ![]() |
September 27, 2021
Last week had all the ingredients for volatility and it didn’t fail to deliver. Yields ended higher across the curve and steepened for the fifth straight week. It was an interesting trip though as yields on 2- to 5-year Treasurys ended the week at/near YTD highs. Through Wednesday, the day the FOMC decision was released, yields on maturities 5-years and longer were still down for the week.
This all changed Thursday after markets more fully digested the ramifications of the Fed’s message and especially their dot plot, which was more hawkish than many had anticipated. My interpretation is “liftoff” occurs sooner and trends towards higher rates than previously forecast. I think this is evident in the chart below from our post-FOMC Economic Flash.
Today – Yields continue higher, 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.
Curve ends week steeper; yields move markedly higher in wake of FOMC meeting
Yields on 2-, 3-, and 5-year maturities are at/near highs for 2021
Yield Curve Shape – 2s-5s 4 bps steeper last week, trend remains higher
Yield Curve Shape –2s-10s spiked through 20-day Mov Avg, 4 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, 3-year maturities flat
- 5-year and shorter unchanged to 2 bps tighter
- Longer maturities 3 bps tighter
- Last week, issuance $2.3 Billion — $7.7 Billion called
- Agency CMBS, MBS, and ARMs
- SBA DCPC spreads 3 bps wider last week
- Spreads are 5 bps wider over the past month, 1 bp tighter YTD
- Spreads on seasoned collateral can be higher, more premium risk though
- 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
- 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 1 bp wider and 30-year 3 bps wider
- Freddie Mac PMMS shows mortgage rates increased slightly last week (likely due to timing)
- 30-year rate at 2.88% (+2 bps from prior) | 15-year rate at 2.15 (+3 bps from prior)
- YTD — 30-year is + 21 and 15-year is -2 bps
- 30-year is +23 from all time low on 1/7/21 of 2.65
- 15-year is +5 from all time low on 8/5/21 of 2.10
- Agency CMOs spreads wider by 2 bps on intermediate PACs
- SBA DCPC spreads 3 bps wider last week
- Municipals
- BQ Munis, 5-year 3 bps tighter, 10-year 3 bps tighter, 15-year 3 bps tighter
- GM Munis, 5-year 3 bps tighter, 10-year 3 bps tighter, 15-year 2 bps tighter
- Taxable Munis, 5-year 1 bp wider, 10-year 2 bps wider, 15-year 6 bps wider
- Corporates
- A-Rated Corporates – 2-year 1 bp tighter, 5-year unchanged, 10-year unchanged
- Vining Sparks Interest Rate Products
- Desk activity still focused on bond portfolio hedging, commercial loan hedging picking up
- Swapping longer, fixed-rate municipal bonds to floating is still popular
- In today’s commentary, we illustrate swapping fixed-rate municipal bonds to floating
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: Fed Official Lael Brainard Says Labor Market, Inflation Can Return to Pre-Pandemic Equilibrium
“Ms. Brainard said she was still more concerned about the Fed failing to meet its target in the years following the recent surge in inflation because of inflation remaining somewhat lower than 2%, as it did last decade. “While the playbook for guiding inflation back down to target following a moderate overshoot is well tested and effective, experience suggests it is difficult to guide inflation up to target from below,” said Ms. Brainard.”
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