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Thursday, October 11, 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 |
| 10/3/18 | 2.15 | 2.23 | 2.41 | 2.62 | 2.85 | 2.94 | 3.02 | 3.10 | 3.15 | 3.24 | 3.30 |
| 10/4/18 | 2.16 | 2.22 | 2.42 | 2.63 | 2.87 | 2.97 | 3.05 | 3.14 | 3.19 | 3.29 | 3.35 |
| 10/5/18 | 2.15 | 2.23 | 2.41 | 2.64 | 2.88 | 2.99 | 3.07 | 3.18 | 3.23 | 3.34 | 3.40 |
| 10/9/18 | 2.17 | 2.25 | 2.46 | 2.65 | 2.88 | 2.98 | 3.05 | 3.15 | 3.21 | 3.30 | 3.37 |
| 10/10/18 | 2.18 | 2.27 | 2.45 | 2.67 | 2.88 | 2.97 | 3.05 | 3.15 | 3.22 | 3.33 | 3.39 |
Source: U.S. Department of the Treasury, as of 10/10/2018
Going Deep with Discounted ARMs
Seasoned discounted adjustable rate mortgages are a compelling story that are getting a lot of attention from bank portfolio managers. With a deep discount ARM, it really doesn’t matter which way rates go for the investor to win.
The example below will reset 12/1/23 at the future1 year Libor rate + 164 basis points. This bond is currently offered at nearly a 2 point discount in price. The mortgage holders currently have a 3.17% rate (weighted average coupon) that will move higher on the reset date if rates remain stable or increase.
As mortgage holders refinance, those dollars come back to the investor at par. With a 5/2/5 cap structure this bond can go up 500 basis points at the first reset. So, if rates stay where they are, or go up, your coupon goes up as well (within caps). When you combine the discount with a 3.49% yield to a 5.3 year average life and the ability to reset later with rates, you can see why this product is so popular.
Seasoned discounted adjustable rate mortgages are a compelling story that are getting a lot of attention from bank portfolio managers. With a deep discount ARM, it really doesn’t matter which way rates go for the investor to win.
The example below will reset 12/1/23 at the future1 year Libor rate + 164 basis points. This bond is currently offered at nearly a 2 point discount in price. The mortgage holders currently have a 3.17% rate (weighted average coupon) that will move higher on the reset date if rates remain stable or increase.
As mortgage holders refinance, those dollars come back to the investor at par. With a 5/2/5 cap structure this bond can go up 500 basis points at the first reset. So, if rates stay where they are, or go up, your coupon goes up as well (within caps). When you combine the discount with a 3.49% yield to a 5.3 year average life and the ability to reset later with rates, you can see why this product is so popular.
Source: Bloomberg 10/11/18
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