| Tuesday, August 8, 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 |
| 8/1/17 | 1.00 | 1.08 | 1.15 | 1.22 | 1.34 | 1.50 | 1.80 | 2.07 | 2.26 | 2.61 | 2.86 |
| 8/2/17 | 1.02 | 1.08 | 1.15 | 1.24 | 1.36 | 1.52 | 1.82 | 2.08 | 2.27 | 2.60 | 2.85 |
| 8/3/17 | 1.00 | 1.08 | 1.13 | 1.22 | 1.34 | 1.49 | 1.79 | 2.05 | 2.24 | 2.56 | 2.81 |
| 8/4/17 | 1.00 | 1.08 | 1.14 | 1.23 | 1.36 | 1.51 | 1.82 | 2.08 | 2.27 | 2.61 | 2.84 |
| 8/7/17 | .99 | 1.02 | 1.14 | 1.22 | 1.36 | 1.52 | 1.81 | 2.07 | 2.26 | 2.60 | 2.84 |
Source: U.S. Department of the Treasury, as of 8/07/17
Buyer Beware – Part 1
Over the past several years, as bond yields have declined and bank margins compressed, portfolio managers have been searching for yield to add to the investment portfolio. In this search for yield, some portfolios have taken declines in credit quality and moved into riskier asset classes not previously seen in community bank portfolio holdings. While adding additional return, some banks have expanded their holdings into less traditional asset classes. In many cases boards and ALCO committees are unfamiliar and unaware of the risks they have added to their portfolios. This week we will profile a few different types of investments we have seen added to portfolios, to familiarize you with various risks associated with each.
An example of a non-traditional community bank portfolio holding, that a few banks have purchased are student loan asset-backed securities (SLABS). In many cases, unless you are closely monitoring performance of these holdings at a security level, you may be unaware that you have an issue. Often they may hide in bond accounting reports due to their higher variable rate coupons and high Bloomberg valuations. In most cases, these were sold to the manager as bullet proof investments, with a government guarantee and non-dischargeable in cases of bankruptcy.
However, SLABS can be risky investments for bank portfolios and a major drag on portfolio performance. Prepayment speeds have slowed nationally, and many of these securities will extend to their full final maturity or longer. These bonds trade in a small secondary market and thus are relatively illiquid. Due to the lack of trading and pricing data, several of these holdings will often price much lower than the bond accounting report shows. This may cause banks to take significant losses should they need the liquidity. Additionally, in many cases these loans are not collateralized causing investors to receive nothing in the case of default unless there is a stated guarantee.
Overall, the marginal increase in yield may not be worth the extension, loss of liquidity or headache trying to track monthly performance. If you already own a student loan bond, please feel free to call us for an updated bid. For those looking for yield, instead of paying a premium for a SLAB, consider putting the premium toward higher coupon (3-4%) fixed rate pools with shorter durations.
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