| Wednesday, December 20, 2017 | ||||||||
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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 |
| 12/12/17 | 1.26 | 1.34 | 1.70 | 1.83 | 1.95 | 2.18 | 2.18 | 2.32 | 2.40 | 2.60 | 2.79 |
| 12/13/17 | 1.22 | 1.30 | 1.47 | 1.68 | 1.79 | 1.90 | 2.12 | 2.26 | 2.36 | 2.56 | 2.74 |
| 12/14/17 | 1.21 | 1.32 | 1.48 | 1.70 | 1.82 | 1.92 | 2.14 | 2.27 | 2.35 | 2.53 | 2.71 |
| 12/15/17 | 1.24 | 1.31 | 1.48 | 1.71 | 1.84 | 1.95 | 2.16 | 2.28 | 2.35 | 2.52 | 2.68 |
| 12/18/17 | 1.26 | 1.38 | 1.51 | 1.70 | 1.84 | 1.94 | 2.17 | 2.30 | 2.39 | 2.57 | 2.74 |
| 12/19/17 | 1.25 | 1.37 | 1.51 | 1.71 | 1.87 | 1.97 | 2.23 | 2.37 | 2.46 | 2.66 | 2.82 |
Source: U.S. Department of the Treasury, as of 12/20/17
Warning: Speed Trap Ahead!
Isn’t it nice when you’re driving down the highway and a considerate driver on the opposite side of the median flashes their lights as a friendly signal of a police officer taking radar ahead? Whereas it’s not their responsibility, it is a much appreciated gesture. Consider this a courteous reminder to watch the speeds… on Mortgage Backed Securities, that is.
The prepayment speed at which a pass through or CMO is shown has a huge impact on yield, and it determines the average life and duration. If a pool has been paying at a particularly faster pace, the yield decreases. And, as you would imagine, the yield increases when speeds slow down.
It is common to present a pool with a Bloomberg Yield Table. The yield table can be overwhelming with the enormous amount of information it contains, but there are specific important data points to focus on. A Historical Yield Table is not as commonly used when being presented an offering, but the key information you need from it to vet the security can be found on the Yield Table.
Below is a Yield Table of a CMO at the current offering price, which shows the auto populated Bloomberg Consensus Speeds:
A breakdown of the entire Yield Table is shown, but for this study pay close attention to #9 which shows the actual prepayment history. In looking at the historical PSA over the 1mo-Life timeframes, you will see the average is 355. Using the speed of 355 in the base case (0bps) shows a much more accurate picture of the yield you could expect. A Yield Table with a base case PSA of 355 is shown below (notice “Custom” in place of 0bps due to the manual entry of 355):
The actual PSA prepayment history produces a decrease of 55bps from the original view. The takeaway here is to make sure the speeds that are driving the yield/average life/duration on a pool you are considering purchasing line up with the prepayment history. A simple yield table alone does not mean the offering is flawed, but, prepayment history is a cautionary “blinking of the lights”, helping you to stay within the speed limit, perhaps keeping you from an unexpected or unpleasant surprise ahead!
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.
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