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Wednesday, February 28, 2018 |
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MANAGING DIRECTOR: |
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US Treasury Market |
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| Date | 1 mo | 3 mo | 6 mo | 1 yr | 2 yr | 3 yr | 5 yr | 7 yr | 10 yr | 20 yr | 30 yr |
| 2/21/18 | 1.40 | 1.64 | 1.85 | 2.03 | 2.26 | 2.44 | 2.69 | 2.86 | 2.94 | 3.11 | 3.22 |
| 2/22/18 | 1.34 | 1.63 | 1.84 | 2.02 | 2.25 | 2.42 | 2.66 | 2.84 | 2.92 | 3.08 | 3.21 |
| 2/23/18 | 1.38 | 1.64 | 1.85 | 2.02 | 2.25 | 2.39 | 2.62 | 2.79 | 2.88 | 3.04 | 3.16 |
| 2/26/18 | 1.39 | 1.66 | 1.87 | 2.03 | 2.22 | 2.37 | 2.60 | 2.77 | 2.86 | 3.03 | 3.15 |
| 2/27/18 | 1.49 | 1.66 | 1.87 | 2.08 | 2.27 | 2.43 | 2.67 | 2.83 | 2.90 | 3.06 | 3.17 |
Source: U.S. Department of the Treasury, as of 2/27/18
Rates Set to Rise in a Controlled Fashion…Cash Flow is King!
Jerome Powell, the new Fed Chairman, said yesterday before Congress that business conditions are favorable and that he expects overnight target rates to increase going forward in a controlled fashion. Specifically, as reported by Bloomberg, he said:
“In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 percent on a sustained basis.’’
He added that:
“The recent correction in the stock market and rising rates on U.S. government debt shouldn’t hamper growth.”
As we noted yesterday, even though higher rates have been traditionally good for banks, this time there is a real danger for both spread and margin compression. In part, this is true because most bankers have lagged raising deposit rates since the first Fed increase in December of 2016. The competition for loans remains challenging and interest income from loans has increased, but in moderation, at least in comparison to the overall 1.25 basis point rate increase. Many community banks run the risk of increasing their cost of funds (COF) at a faster pace than they are able to increase their overall Yield on Earning Assets.
In response to the above scenario and as mentioned in the headline above, as rates rise, cashflow is King! It allows for either reinvestment or the ability to offer new loans at a potentially higher rate. In terms of securities, we believe MBS pools provide the best cashflow while still offering a completive rate.
In particular, the seasoned FN 15 year with a 3.0% coupon (outlined below) is a good example of a higher yield (2.81%) with short duration (3.3 years) and great cashflow. Note, the cashflow table for a current face of $2,605,418 returns over $500,000 in the first year!
Please call us for this or other similar securities:
This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.
•Not FDIC Insured •No Bank Guarantee •May Lose Value