| Tuesday, April 23, 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 |
| US Treasury Market | |||||||||||
| Date | 1 mo | 3 mo | 6 mo | 1 yr | 2 yr | 3 yr | 5 yr | 7 yr | 10 yr | 20 yr | 30 yr |
| 04/16/19 | 2.43 | 2.43 | 2.47 | 2.45 | 2.41 | 2.38 | 2.41 | 2.50 | 2.60 | 2.81 | 2.99 |
| 04/17/19 | 2.43 | 2.43 | 2.47 | 2.45 | 2.41 | 2.38 | 2.41 | 2.50 | 2.60 | 2.81 | 2.99 |
| 04/18/19 | 2.44 | 2.42 | 2.47 | 2.44 | 2.38 | 2.36 | 2.38 | 2.46 | 2.57 | 2.78 | 2.96 |
| 04/19/19 | 2.44 | 2.42 | 2.47 | 2.44 | 2.38 | 2.36 | 2.38 | 2.46 | 2.57 | 2.78 | 2.96 |
| 04/22/19 | 2.44 | 2.44 | 2.47 | 2.46 | 2.38 | 2.36 | 2.39 | 2.49 | 2.59 | 2.82 | 2.99 |
Premium Callables – A Return to Value
Lower rates have led to a dramatic increase in the amount of bonds called by U.S. agencies. Looking at statistics in all of 2018 the agencies called $5.27 billion, compared to March of 2019 when the agencies called $21.83 billion in this single month.
There is yield pick-up in callables vs. bullets as the call option is owned by the issuer. The general strategy for a callable investor is to seek yield and minimize the call risk. However, there is another strategy, a strategy where by you can turn the “call risk” to your advantage.
Callable bonds with similar structure to new issues but have higher coupons are offered above par, a “premium.” In most cases, they will be called on the first call date. A good comparison is to home owners; when they can make lower monthly mortgage payments they refinance. When agencies can make lower interest payments they will call the bonds and reissue lower coupon bonds - and they are extremely efficient in exercising their call options.
For example, details below highlight an attractive premium bond:
FEDERAL FARM CREDIT BANK
3.65% due 2/28/2034, callable 2/28/2022, continuously thereafter.
Yield to call: 3.20% // +84 bp to the Treasury
Yield to Maturity: 3.54% //+88 bp to the Treasury
The preferred and probable outcome is YTC of 3.20%, slightly less than three years. If the bond is not called the YTM is 3.54%, an attractive outcome as well.
Please contact your portfolio representative for details on the current market availability and yields on callables at a premium.
There is yield pick-up in callables vs. bullets as the call option is owned by the issuer. The general strategy for a callable investor is to seek yield and minimize the call risk. However, there is another strategy, a strategy where by you can turn the “call risk” to your advantage.
Callable bonds with similar structure to new issues but have higher coupons are offered above par, a “premium.” In most cases, they will be called on the first call date. A good comparison is to home owners; when they can make lower monthly mortgage payments they refinance. When agencies can make lower interest payments they will call the bonds and reissue lower coupon bonds - and they are extremely efficient in exercising their call options.
For example, details below highlight an attractive premium bond:
FEDERAL FARM CREDIT BANK
3.65% due 2/28/2034, callable 2/28/2022, continuously thereafter.
Yield to call: 3.20% // +84 bp to the Treasury
Yield to Maturity: 3.54% //+88 bp to the Treasury
The preferred and probable outcome is YTC of 3.20%, slightly less than three years. If the bond is not called the YTM is 3.54%, an attractive outcome as well.
Please contact your portfolio representative for details on the current market availability and yields on callables at a premium.
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