Sector Update

September 7, 2021

The yield curve steepened again last week. Yields on maturities 7-years and in fell 1-2 bps or remained unchanged while longer maturities increase by 1-2 bps. Looking back over the past four weekly closing yields, 5- and 10-year Treasury yields are within 3-4 bps. However, we continue to see intraweek volatility, especially around economic releases markets use to gauge “substantial progress” in regard to employment.

It was interesting then on Friday, after the nonfarm payroll report was very disappointing (to say the least), that yields increased across the curve. Some speculated this was due to thin trading before a holiday but that wouldn’t explain why yields are up 4-5 bps today on maturities 5-years and longer. As we’ve previously written, for balance sheets with excess liquidity, this is likely a welcome change as counterintuitive as the increase in yields seems.

Today – Yields move higher, curve steeper, stocks largely in negative territory

Curve ends week slightly steeper, longer yields increase, shorter yields drop

Week-over-week, not much change, within recent ranges

Yield Curve Shape – 2s-5s remains above 20-day MA, trending sideways

Sector Commentary

Government/Agency Space
- Bullet spreads relatively unchanged
  - Relatively constant for past month, longer end has widened
- Callables mixed
  - 5-year and shorter unchanged to 1 bp wider
  - Longer maturities 2 bps tighter
- Last week, issuance $10.0 Billion — $2.2 Billion called

Agency CMBS, MBS, and ARMs
- SBA DCPC spreads 3 bps wider on the week
  - Spreads are 1 bp wider over the past month, 3 bps tighter YTD
  - Spreads on seasoned collateral can be higher, more premium risk though
  - Secondary pieces move quickly when available
- SBA Floating 7(a) Pool speeds released (8/13)
  - Prepayments picked up, more so in longer real-estate pools
  - NFIB Small Business Optimism Index declined in most recent survey
  - Single biggest issue remains quality of labor
  - 49% report having job openings they are unable to fill, breaking a 48-year record
  - Inflation concerns eased but remain elevated
- Agency MBS spreads were wider, 15-year 1 bp wider and 30-year 2 bps wider
  - Freddie Mac PMMS shows mortgage rates +/- 1 bp from prior week
  - 30-year rate at 2.87% (unch. from prior) | 15-year rate at 2.18 (+1 bp from prior)
    - YTD — 30-year is + 20 and 15-year is +1 bp
    - 30-year is +22 from all time low on 1/7/21 of 2.65
    - 15-year is +8 from all time low on 8/5/21 of 2.10
- Agency CMOs spreads unchanged from prior week
  - Cut-coupons still favored by many
Municipals
- BQ Munis, 5-year 1 bp wider, 10-year 2 bps tighter, 15-year 2 bps tighter
- GM Munis, 5-year 2 bps wider, 10-year 1 bp tighter, 15-year 2 bps tighter
- Taxable Munis, 5-year 4 bps tighter, 10-year 1 bp wider, 15-year 2 bps wider

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

Vining Sparks Interest Rate Products
- Swapping longer, fixed-rate municipal bonds to floating is most popular transaction with clients
- Current floating yields can vary widely depending on underlying fixed coupon on the bond hedged
- Can also swap existing municipal positions in your portfolio

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 (August) | Monthly, 5^th business day

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

WSJ: Jobs Won’t Look Great in September, Either

“Both demand for and the supply of workers should increase if Covid-19 goes back into retreat, but don’t expect to see that in the September employment report. Daily Covid-19 case counts, hospitalizations and deaths are higher now than they were in the middle of August, when the Labor Department took its monthly employment readings.”

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