Thursday, February 8, 2018
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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
2/1/18	1.41	1.48	1.64	1.89	2.16	2.33	2.56	2.72	2.78	2.90	3.01
2/2/18	1.40	1.48	1.65	1.88	2.15	2.33	2.58	2.76	2.84	2.97	3.08
2/5/18	1.40	1.51	1.67	1.85	2.08	2.25	2.50	2.68	2.77	2.92	3.04
2/6/18	1.48	1.52	1.69	1.87	2.10	2.30	2.52	2.70	2.79	2.94	3.06
2/7/18	1.36	1.55	1.73	1.91	2.15	2.33	2.57	2.75	2.84	3.01	3.12

                                                                                      Source: U.S. Department of the Treasury, as of 2/07/18  

Yield Seekers Search for FFIEC Pass

A strategy which has worked well for US agency mortgage-backed securities (MBS) investors seeking predictable duration and cashflow properties has been to acquire new issue 10yr fully amortizing and seasoned 15yr MBS pools.  These pools produce reasonable yield profiles and have a history of consistent cash flows which are extension resistant.  We continue to recommend them for portfolios seeking such characteristics. 

A different approach is favored for portfolios focused on increasing nominal yield while preserving a measure of cashflow aggregation.  Slightly seasoned 20yr MBS pools deliver a comparatively attractive yield profile and maintain manageable extension risk.  This latter feature is a key reason these securities pass the FFIEC high risk security test (a price volatility and WAL risk metric most commonly associated with Collateralized Mortgage Obligation due diligence).  For portfolios less interested in vigorously limiting extension risk and more interested in nominal yield enhancement, 20yr MBS pools hit the mark.

An example:

FNMA MBS Pool MA2804, 3.0% Coupon, 20yr original final maturity (with 16 months of payment history, aka “seasoning”) offered @ 99-28+ for February 13 settlement.  It is comprised of 6,987 conforming loans which were originated in 2016 with California contributing the most at 17%.  The prepayment experience has been consistent with CPR speeds ranging from 4.5 to 6.2 variously. As illustrated in the yield table below the base case scenario achieves 3.0% nominal yield and a WAL of 5.81yr. This represents 37bps more yield than the same point along the Treasury curve.  If rates rise 300bps, though the nominal yield profile does not change, the WAL extends to 7.37yrs (due to slowing prepayments).  In this scenario forecasted price action will be commensurately lower, yet not to the degree that the bond fails the FFIEC test.  For the appropriate portfolio, this may be a good fit.  Offering details are for illustration only.  Price, yield and availability are subject to change.

Please call your CCB Capital Markets representative for further discussion on this or any other topic of importance to you.

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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