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Thursday, April 12, 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 |
| 4/5/18 | 1.67 | 1.72 | 1.93 | 2.07 | 2.30 | 2.45 | 2.64 | 2.76 | 2.83 | 2.95 | 3.07 |
| 4/6/18 | 1.68 | 1.73 | 1.91 | 2.06 | 2.27 | 2.40 | 2.58 | 2.70 | 2.77 | 2.89 | 3.01 |
| 4/9/18 | 1.67 | 1.76 | 1.93 | 2.08 | 2.29 | 2.43 | 2.60 | 2.72 | 2.78 | 2.89 | 3.02 |
| 4/10/18 | 1.63 | 1.74 | 1.93 | 2.09 | 2.32 | 2.45 | 2.62 | 2.74 | 2.80 | 2.89 | 3.02 |
| 4/11/18 | 1.64 | 1.73 | 1.95 | 2.09 | 2.32 | 2.45 | 2.62 | 2.72 | 2.79 | 2.87 | 2.99 |
Source: U.S. Department of the Treasury, as of 4/11/18
Agency ARM’s have, and are likely to continue, to outperform any fixed coupon position we currently have on the books as rates move higher. Did any of your fixed coupon positions offer strong cash flow and minimal price depreciation as rates nearly doubled on the front end of the curve over the past year and a half? Ours didn’t either, however our Agency ARM’s did.
How could it be? As rates moved higher, the underlying mortgage holders had an incentive to refinance and either lock in a 30YR fixed rate or buy another 5-7 years with a new ARM before their coupon repriced. Meanwhile you, the bondholder, have been amortizing any premium you may have paid to the reset and your PAR bond is now resetting higher in coupon, most likely creating a gain in your security.
Wait, rates went higher and I received more cash flow to reprice at higher rates and not only did my position not lose value, I can now take a gain? YUP! It is not a dream, it is however a structure all banks should consider, as our biggest threat continues to be higher rates creating interest rate risk.
Country Club Bank has recommended this structure for years and it has yet to disappoint. There are certain things you must look for when analyzing Agency ARM’s and you can be sure we know what to look for because as a community bank, we have many of the same needs. It is always important to remember, there are very few if any in our industry that eat their own cooking.
There are currently a few Agency ARM pools that are offering just over 3% along with a 500 BP initial and lifetime CAP. Give us a call to discuss.
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