Friday, March 16, 2018
MANAGING DIRECTOR: Scott Carrithers   PORTFOLIO SALES AND SERVICE: Steve Panknin • George Morris • Jeff Goble • Chris Thompson • Sean Doherty Kevin Doyle • Lonnie Harris •  Mark Tranckino • Robert Schuyler • Tom Toburen • Josh Kiefer  Nicole Burczyk • Kelley Frye • Natalie Regan • Aaron Stoffer • Chuck Honeywell

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
3/9/18	1.57	1.67	1.89	2.03	2.27	2.45	2.65	2.82	2.90	3.04	3.16
3/12/18	1.60	1.71	1.89	2.05	2.27	2.43	2.64	2.79	2.87	3.00	3.13
3/13/18	1.64	1.73	1.90	2.03	2.26	2.41	2.62	2.77	2.84	2.98	3.10
3/14/18	1.71	1.76	1.94	2.05	2.26	2.41	2.61	2.75	2.81	2.94	3.05
3/15/18	1.70	1.77	1.95	2.07	2.29	2.42	2.62	2.76	2.82	2.94	3.05

                                                                                      Source: U.S. Department of the Treasury, as of 3/15/18  

Opportunity in Lower Priced ARMs


With mortgage rates on the rise and bond prices falling, we have been able to find good investment opportunities in ARMs at or near par. This opportunity, however, is not likely to last for long.  April and May new issue ARM coupons are now north of 3% which translates into a dollar price of 101 or higher.  We expect the trend toward higher coupons and dollar prices to continue for the foreseeable future, unless the yield curve changes substantially. Typically, new issue 5/1 ARMs trade in the 101-104 dollar price range.

                                                                                                                                                       Source:  Bloomberg/Bankrate         

We believe ARMs near par add substantial value over higher premium bonds for a few reasons: 1) Less volatile yield profiles 2) Limited premium risk for depositories (changing CPRs will have less of an impact) 3) Typically, bids will be over par prior to the first reset (<18 months to reset).  We find that most clients amortize to the first reset, however if you amortize over the WAL, these bonds should be particularly attractive vs premium bonds as you aren’t beholden to money market investor sentiment (Over the last several years pre-resetting ARMs bids have varied between 100-105).  Par ARMs with limited base case yield differentials vs premium ARMs (Assuming a 15 CPR) appear to have a positive risk/reward skew into a rising interest rate environment. 

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