Stimulus fever has hit the bond market as talks between House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin were deemed positive enough to send 10-year yields above 0.80%, a four-month high, climbing as high as 0.834%. Currently the 10-year yield sits at 0.814%. While the odds of a deal passing prior to the election look slim, the markets are pricing in that a deal does get done in some form or fashion and passed prior to January. A range of amounts have been rumored with most centered around the $1.6 -$2.0 trillion range. The CARES Act pumped in more than $1.8 trillion in direct aid to individuals and businesses so a Stimulus 2.0 in the rumored range would be of similar size. The wildcard is if the election brings a Blue Wave the Dems will dust off the $3.2 trillion package the House passed back in May that went nowhere in the Senate. That would prompt another move higher for yields. For 10’s, the June peak of 0.95% represents key support. For now, the markets are betting a package of some sort gets passed, it’s just the size and timing that remains uncertain. Most of that uncertainly should be cleared away in the next couple weeks.


newspaper icon  Economic News

If you were looking for a kink in the armor of housing you didn’t find it in yesterday’s September Housing Starts and Building Permits Report. New home starts increased on a sharp gain in single-family house construction while building permits climbed, indicating residential building should continue to display momentum in the fourth quarter. Residential starts increased 1.9% to a 1.42 million annualized from a month earlier, just missing the 1.47 million consensus forecast from Bloomberg while permits to build, a proxy for future construction, rose 5.2% to a 1.55 million rate, the fastest since 2007 and topping the 1.52 million forecast.

Housing Starts and Permits

 

Also of note, construction of single-family homes climbed in September to the highest level in more than 13 years, and accounted for 78% of total homebuilding which was the largest share since 2010. At the same time, fewer multifamily projects were started, which reflects shifting tastes as pandemic fears have Americans seeking more space and moving from denser urban areas to the more open   suburbs. This surge in single-family construction has forced all manner of inputs from lumber to electrical to copper prices to all-time highs, or near it. These price increases may eventually dampen some of the building activity but not for now.

 

 


line graph icon  Livestream Event Highlights Community Bankers Thoughts for 2021

 

Last Thursday, CenterState hosted its first Livestream event where we discussed interest rates and the economy and where both are likely to head in the next year. We followed that with an investment panel discussion that explored ideas and strategies to navigate the challenges that 2021 will no doubt present. We had approximately 45 bankers in attendance for the show.

 

Because we wanted to make this an interactive event with participation from our virtual audience during the course of the two-hour show, we posed a series of poll questions where viewers could provide their answers and see the totals in real-time during the course of the program.  We wanted to provide those poll questions here and the answers for each. This way you can get glimpse of what your fellow community bankers are thinking about certain topics as we head into year-end and 2021.

 

1. A year from now, where do you see rates moving?

  • Higher (0%)
  • Lower (25%)
  • Level (75%)

2. In 2021, where do you see the credit risk in your bond and loan portfolios?

  • Increasing (83%)
  • Decreasing (0%)
  • Level (17%)

3. Which of these risks are you most willing to take on to achieve your bond portfolio goals?

  • Duration Risk (82%)
  • Credit Risk (12%)
  • Optionality Risk (6%)

4. Which is the biggest risk when buying MBS’s in this environment?

  • Premium/ Prepay Risk (95%)
  • Price Volatility/Extension Risk (5%)

5. What would make you more willing to increase the size of your bond portfolio?

  • More liquidity at your bank (55%)
  • Less concern about a material rise in rates (45%)

 


bar graph iconAgency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 0.15 0.26 0.44 0.60 1.52 2.00
0.50 0.16 0.28 0.44 0.60 1.38 1.88
1.00 0.16 0.28 0.44 0.60 1.32 1.81
2.00 0.26 0.40 0.57 1.25 NA
3.00 1.17 NA
4.00 1.12 NA
5.00 1.07 NA
10.00 NA

Securities offered through the SouthState Bank Correspondent Division ("SouthState") 1) are not FDIC insured, 2) not guaranteed by any bank, and 3) may lose value including a possible loss of principal invested. SouthState does not provide legal or tax advice. Recipients should consult with their own legal or tax professionals prior to making any decision with a legal or tax consequence. The information contained in the summary was obtained from various sources that SouthState believes to be reliable, but we do not guarantee its accuracy or completeness. The information contained in the summary speaks only to the dates shown and is subject to change with notice. This summary is for informational purposes only and is not intended to provide a recommendation with respect to any security. In addition, this summary does not take into account the financial position or investment objectives of any specific investor. This is not an offer to sell or buy any securities product, nor should it be construed as investment advice or investment recommendations.

Published: 10/21/20 Author: Thomas R. Fitzgerald