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)

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

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