Thursday, May 17, 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
5/10/18	1.69	1.90	2.05	2.27	2.54	2.69	2.83	2.94	2.97	3.04	3.12
5/11/18	1.68	1.92	2.06	2.28	2.54	2.69	2.84	2.94	2.97	3.03	3.10
5/14/18	1.70	1.93	2.09	2.28	2.55	2.70	2.85	2.96	3.00	3.06	3.13
5/15/18	1.69	1.92	2.09	2.31	2.58	2.75	2.92	3.04	3.08	3.14	3.20
5/16/18	1.69	1.92	2.09	2.32	2.58	2.76	2.94	3.05	3.09	3.16	3.21

                                                                                      Source: U.S. Department of the Treasury, as of 05/16/18  

                                                                                 

                                                                   Fed Continues On Its Path

Whatever one might think about the U.S. political situation, it’s hard to deny that the economy is doing just fine.  In April, the unemployment rate dropped to 3.9 percent, a 17 year low.  Should this “Goldilocks” economy continue to perk along, it is perceived that the Fed will do likewise in an effort to return rates to “normal” levels.

Remember, much like Japan, there is a strong school of thought that the U.S. economy has gotten hooked on artificially low interest rates and a return to “normal” cannot be obtained.  That may be the case, but what if it’s not and the Fed’s march to normalcy is successful?

Take a look at the Fed Fund Futures chart below.  The market has priced in a very high likelihood of two more increases this year.  In addition, the Fed’s dot plot has Funds trading between 3% to 3.50% in 2019 and 2020.

Given these possibilities and a general need for liquidity it might be a good time to revisit the possibility of utilizing our BalanCD program.  At first glance your initial reaction might be, “costs are too high versus my current cost of funds.”  That could be true, but CURRENT is the optimum word here.

The beauty of the program is YOU control a potential call option for very little cost. For example:

               5 YEAR Fixed C.D. Rate = 3.20%*         5 YEAR C.D. Rate with call = 3.25%*
             10 YEAR Fixed C.D. Rate = 3.40%*        10 YEAR C.D. Rate with call = 3.50%*
                                                                                                                             (*Indication Only)

Because the market anticipates a rising rate environment it places very little value on the call option, which is exactly why you may want to purchase it.

In a perfect world, many think that the Fed would like to achieve 2.00% inflation AND have a real return on Money Market instruments close to its historic level of 1.00%.  That would equate to a 3.00% Fed Funds rate.  If that is the case, 5 and 10 year money in the low 3’s would look very attractive.  Throw in a call option in case events occur whereby the Fed stops tightening or might even reverse course and you might be looking at a home run!

                                                                                                                                                 

                 Source:  Bloomberg                                

        

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.

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