| Thursday, September 28, 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 |
| 9/21/17 | .99 | 1.04 | 1.19 | 1.31 | 1.45 | 1.59 | 1.89 | 2.11 | 2.27 | 2.57 | 2.80 |
| 9/22/17 | .97 | 1.03 | 1.19 | 1.30 | 1.46 | 1.58 | 1.88 | 2.10 | 2.26 | 2.57 | 2.80 |
| 9/25/17 | .97 | 1.05 | 1.19 | 1.30 | 1.44 | 1.56 | 1.85 | 2.07 | 2.22 | 2.53 | 2.76 |
| 9/26/17 | .96 | 1.06 | 1.19 | 1.31 | 1.45 | 1.57 | 1.87 | 2.08 | 2.24 | 2.54 | 2.78 |
| 9/27/17 | .99 | 1.07 | 1.20 | 1.33 | 1.47 | 1.60 | 1.91 | 2.14 | 2.31 | 2.62 | 2.86 |
Source: U.S. Department of the Treasury, as of 9/27/17
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Cheaper and... Steeper?
The sell-off continued overnight as UST 10yr yield crossed the 200-day moving average of 2.327% to peak at 2.357% causing large trades in treasury futures. A put option with a 124.5 strike was also traded, which equates to protection to sell UST 10yr at 2.50%. That level was last seen in March on its way down from its high of 2.627%.
UST 2s10s yield curve is also 9.2bps steeper on this recent move cheaper; however, nowhere close to our March levels of 120bps. The two Fed hikes within that time frame and now a 70% chance of another hike in December according to Bloomberg WIRP have caused our curve to remain in this flatter yield curve environment. Since the recession the yield curve has been below 100bps for two periods, in 2016 and now.
Trump’s election win on an economic pro-growth platform caused bond yields to steepen out of the flat environment last year, and the bond market is looking for the same as D.C. works on passing Trump’s tax plan, released yesterday. There will likely be noise as the tax plan is debated and details change that can cause bonds to react. The risk is that a pro-growth tax plan loses odds of getting passed as anticipation grows for a December Fed hike. If so, then we’re looking at a potentially flatter curve at risk of inversion. One other factor that could affect the curve is the balance sheet unwind set to start next month. Although, the Fed’s intent is for it to be uneventful with minimal market impact, the curve could use some steepening before the next hike.
Strategy: Should any of the Administration’s tax cuts pass, the long end could underperform. Shorter duration investments with good cash flow would be the preference. One such instrument would be our mortgage security, 114 WAM seasoned FNMA 15yr 2.5% with an average life of 3.74 and still yields over 2.00%.
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