Friday, January 18, 2019 |
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| MANAGING DIRECTOR: Scott Carrithers PORTFOLIO SALES AND SERVICE: Steve Panknin • George Morris • Jeff Goble • Chris Thompson • Sean Doherty Kevin Doyle • Lonnie Harris • Mark Tranckino • Robert Schuyler • Tom Toburen • Josh Kiefer Nicole Burczyk • Kelley Frye • Natalie Regan • Aaron Stoffer • Chuck Honeywell • Gus Koppen |
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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 |
| 01/11/19 | 2.41 | 2.43 | 2.50 | 2.58 | 2.55 | 2.51 | 2.52 | 2.60 | 2.71 | 2.90 | 3.04 |
| 01/14/19 | 2.42 | 2.45 | 2.52 | 2.57 | 2.53 | 2.51 | 2.53 | 2.60 | 2.71 | 2.91 | 3.06 |
| 01/15/19 | 2.41 | 2.45 | 2.52 | 2.57 | 2.53 | 2.51 | 2.53 | 2.61 | 2.72 | 2.92 | 3.08 |
| 01/16/19 | 2.41 | 2.43 | 2.49 | 2.57 | 2.55 | 2.53 | 2.54 | 2.62 | 2.73 | 2.92 | 3.07 |
| 01/17/19 | 2.41 | 2.42 | 2.50 | 2.57 | 2.56 | 2.55 | 2.58 | 2.66 | 2.75 | 2.93 | 3.07 |
Source: U.S. Department of the Treasury, as of 01/17/2019
Buying out on “the curve”
Is the Fed finished with its latest round of tightening? We don’t know, but it is beginning to appear as if it might be. In any event, it doesn’t really matter, at least in terms of managing the investment portfolio. Assuming your current balance and investment portfolio is in line with most peer groups, we believe now is the time to add bonds “out on the curve”. How far out you might be asking? Our thought is that somewhere in the ten year range or even longer.
Keep in mind, another Fed increase of 25 bps will most likely have little or no effect on the ten year treasury, which trades off market expectations and measurable inflation. Yes, the current economic expansion could continue indefinitely leading to a higher yielding ten year, but it is impossible to “call” or out guess the market. In fact, we are at, or near, a critical “balancing” point in determining “rates”. The flattening yield curve is signaling a disconnect between the Fed’s moves (overnight funds and even the two year treasury at 2.25%) and the “market” driven ten year treasury at 2.75%. The spread between the two year and ten year has been hovering between 16 and 20 basis points in last month or so. This narrow spread between these two points on the treasury curve is the basic “bankers trap”. Beware, there is risk in staying short! The short end of the curve will drop like a rock when the Fed makes the first “easing” move, whenever that happens.
The strategy is simple. Buy out on the curve, if rates move down you win. If rates move up, so what, keep cost averaging and buy the “new” ten year rate with the next purchase. A current 3.0% yield captured now will remain on the books long after the current overnight rate of 2.5%, when the Fed does begin to ease.
A great “compromise” between a ten year and two year decision is the 15 year 4% FG G18724 MBS outlined below. The duration is 4.7 years and the yield is 3.34% at the current pricing speed. See the details below, which clearly illustrates the cashflow and “behavior” if rates change. Call if you have questions, or if you have interest in this bond or one like it.
Is the Fed finished with its latest round of tightening? We don’t know, but it is beginning to appear as if it might be. In any event, it doesn’t really matter, at least in terms of managing the investment portfolio. Assuming your current balance and investment portfolio is in line with most peer groups, we believe now is the time to add bonds “out on the curve”. How far out you might be asking? Our thought is that somewhere in the ten year range or even longer.
Keep in mind, another Fed increase of 25 bps will most likely have little or no effect on the ten year treasury, which trades off market expectations and measurable inflation. Yes, the current economic expansion could continue indefinitely leading to a higher yielding ten year, but it is impossible to “call” or out guess the market. In fact, we are at, or near, a critical “balancing” point in determining “rates”. The flattening yield curve is signaling a disconnect between the Fed’s moves (overnight funds and even the two year treasury at 2.25%) and the “market” driven ten year treasury at 2.75%. The spread between the two year and ten year has been hovering between 16 and 20 basis points in last month or so. This narrow spread between these two points on the treasury curve is the basic “bankers trap”. Beware, there is risk in staying short! The short end of the curve will drop like a rock when the Fed makes the first “easing” move, whenever that happens.
The strategy is simple. Buy out on the curve, if rates move down you win. If rates move up, so what, keep cost averaging and buy the “new” ten year rate with the next purchase. A current 3.0% yield captured now will remain on the books long after the current overnight rate of 2.5%, when the Fed does begin to ease.
A great “compromise” between a ten year and two year decision is the 15 year 4% FG G18724 MBS outlined below. The duration is 4.7 years and the yield is 3.34% at the current pricing speed. See the details below, which clearly illustrates the cashflow and “behavior” if rates change. Call if you have questions, or if you have interest in this bond or one like it.
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