What Will We Learn From a Virtual Jackson Hole Today?

The waiting is just about over for Fed Chair Jerome Powell’s keynote address at a virtual Jackson Hole. His prepared remarks will be released at 10am ET but that hasn’t stopped several regional Fed presidents  from front-running the chairman and declaring that tapering should begin now, or fairly soon, and wrap up by early 2022. Do they know what the Chairman will say, or is it just more attempts to garner headlines? We shall see shortly but the market took the comments of non-voters Bullard, Kaplan, and George largely in stride as they await the more consequential thoughts from Powell.

Finally, in our podcast this week we talk about the importance of internship programs for your bank. We speak with Lisa Blatter, Director of Campus Recruiting and Career Development for SouthState and also with Shaina Patel and Corey Stepanek, two interns who spent their summer in the program. The iTunes link can be found here and the Spotify here.

 


The Market gets Tapering but When are Rate Hikes Coming?

Fed Chair Powell speaks later today in his virtual Jackson Hole keynote address but his prepared remarks will be released at 10am ET so the waiting is just about over for the market. What are we likely to hear? Probably not many details about tapering like when and how quickly, but the market is mostly expecting that outcome anyway. The market pretty much assumes tapering begins later this year or early next year and proceeds through most of 2022. If something different is offered up today expect some volatile trading to ensue. Another thing to keep in mind, when tapering is completed the Fed will still be reinvesting returning principal in Treasury and MBS securities. That $8.34 trillion balance sheet won’t be shrinking, it just won’t be growing like we’ve seen over the past 18 months.  The real question the market would like answered is how quickly will the Fed move from tapering to rate hikes? Presently, the guessing is a 6 to 9 month window between the two as that was the experience in the last tapering-to-rate-hike transition, but I would guess Powell will not offer up that much detail given the still uncertain pandemic environment.

 

Source: Bloomberg

In reality, he knows given the unfolding delta variant drama this summer that the pandemic may yet have more surprises up its proverbial sleeve. We suspect, we will hear something along the lines of rate hikes will depend on the course of the pandemic at that time which guides the course of the economy in the Fed’s current calculus. Also, we remain convinced Powell is adamant to return to something close to full employment, and as long as inflation pressures moderate from the spikes of late he will be hesitant to pursue rate hikes on a faster timeline. Given a tapering schedule that likely consumes most of 2022 and a pause after the end of that process, rate hikes still seem to be more a 2023 event than a 2022.


MBS Yield Spreads Continue to Widen in August

It’s been awhile since we checked in on the MBS market and as the graph below shows yield spreads moved to multi-year tights in April and May as the rally in Treasuries was fully joined by the MBS sector as well. After May, however, MBS yield spreads started to widen against Treasuries (5yr/10yr blend) with it peaking at 79bps just a few days ago.

 

Source: Bloomberg

That widening occurred as the Treasury rally that started in April continued in June and July with the 10-year yield dropping a full 40bps during that time, a pace that MBS couldn’t match and thus the spread widening during that time. The average spread over the last two years has been 74bps which is just above the current spread of 73bps. While spreads have improved of late, increasing 13bps off the lows, they remain virtually at the two-year average. Adding to the bonus of spread widening of late is the fact that the 10-year Treasury yield has moved up 15bps in August so combined with the spread widening yields are at levels last available in early July. If Treasury yields continue to remain under pressure off developments at Jackson Hole it could be an opportune time to add some exposure in this sector.


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 0.13 0.40 0.67 1.00 1.75 2.21
0.50 0.12 0.37 0.61 0.89 1.61 2.10
1.00 0.11 0.34 0.58 0.85 1.52 1.97
2.00 0.33 0.52 0.77 1.40 NA
3.00 0.72 1.34 NA
4.00 1.29 NA
5.00 1.26 NA
10.00 NA

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Published: 08/26/21 Author: Thomas R. Fitzgerald