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Thursday, October 18, 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 |
| 10/11/18 | 2.14 | 2.27 | 2.44 | 2.66 | 2.85 | 2.94 | 3.00 | 3.09 | 3.14 | 3.25 | 3.32 |
| 10/12/18 | 2.14 | 2.28 | 2.44 | 2.66 | 2.85 | 2.93 | 3.00 | 3.09 | 3.15 | 3.25 | 3.32 |
| 10/15/18 | 2.17 | 2.31 | 2.47 | 2.67 | 2.85 | 2.94 | 3.01 | 3.10 | 3.16 | 3.27 | 3.34 |
| 10/16/18 | 2.19 | 2.30 | 2.46 | 2.66 | 2.87 | 2.95 | 3.02 | 3.10 | 3.16 | 3.26 | 3.32 |
| 10/17/18 | 2.20 | 2.31 | 2.47 | 2.66 | 2.89 | 2.97 | 3.04 | 3.13 | 3.19 | 3.29 | 3.35 |
Source: U.S. Department of the Treasury, as of 10/17/2018
Reviewing ARM Structures
Earlier in the week we discussed investing according to your interest rate outlook. While it is important to make projections, it is also important to diversify investments and hold quality products that perform well in a variety of interest rate scenarios.
While adjustable rate products are best known for their performance in rising rates, certain structures also limit an investors’ downside risk.
When looking for ARMS that will perform well in both rate scenarios, look for offerings with a large margin. Typically coupons of adjustable rate mortgages reset based on an index +a given margin. So if your margin is 1.64%, your coupon will not drop below the margin even if the index were to drop to zero.
Source: Bloomberg
Libor hasn’t been below .50 throughout the last crisis. Even if we did reach that low in rate again your coupon would still be 2%.
Source: Bloomberg
The next feature of ARMS to understand, is their cap structure. Both 5/2/5 and 2/2/5 are common structures. However, the difference between a 2 and a 5 in the first position is more significant than many investors realize, as it is the amount the coupon can adjust at the first reset. If you think rates are going up significantly, you would prefer a larger initial reset; however, if you think rates have peaked you would prefer the lower initial reset and focus more on the margin.
Source: Bloomberg
Please call your CMG Representative for more information on the bond featured above.
Earlier in the week we discussed investing according to your interest rate outlook. While it is important to make projections, it is also important to diversify investments and hold quality products that perform well in a variety of interest rate scenarios.
While adjustable rate products are best known for their performance in rising rates, certain structures also limit an investors’ downside risk.
When looking for ARMS that will perform well in both rate scenarios, look for offerings with a large margin. Typically coupons of adjustable rate mortgages reset based on an index +a given margin. So if your margin is 1.64%, your coupon will not drop below the margin even if the index were to drop to zero.
Source: Bloomberg
Libor hasn’t been below .50 throughout the last crisis. Even if we did reach that low in rate again your coupon would still be 2%.
Source: Bloomberg
The next feature of ARMS to understand, is their cap structure. Both 5/2/5 and 2/2/5 are common structures. However, the difference between a 2 and a 5 in the first position is more significant than many investors realize, as it is the amount the coupon can adjust at the first reset. If you think rates are going up significantly, you would prefer a larger initial reset; however, if you think rates have peaked you would prefer the lower initial reset and focus more on the margin.
Source: Bloomberg
Please call your CMG Representative for more information on the bond featured above.
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