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Wednesday, June 27, 2018 |
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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 |
| 6/20/18 | 1.85 | 1.94 | 2.14 | 2.36 | 2.56 | 2.67 | 2.80 | 2.89 | 2.93 | 2.99 | 3.06 |
| 6/21/18 | 1.85 | 1.94 | 2.12 | 2.34 | 2.56 | 2.65 | 2.77 | 2.86 | 2.90 | 2.97 | 3.04 |
| 6/22/18 | 1.83 | 1.93 | 2.11 | 2.33 | 2.56 | 2.65 | 2.77 | 2.86 | 2.90 | 2.97 | 3.04 |
| 6/25/18 | 1.80 | 1.93 | 2.13 | 2.34 | 2.54 | 2.63 | 2.75 | 2.83 | 2.87 | 2.95 | 3.02 |
| 6/26/18 | 1.79 | 1.93 | 2.14 | 2.33 | 2.53 | 2.63 | 2.75 | 2.84 | 2.88 | 2.95 | 3.03 |
Source: U.S. Department of the Treasury, as of 06/26/2018
Will Tariff Troubles Send Rates Lower?
Most companies are reporting improved earnings, as the economy expands and taxes have been cut. So, what’s not to like? Ask the folks who work at the Harley Davidson plant in Kansas City. Tariffs and a potential “trade war” are taking a toll.
Let’s assume for a minute that “cooler heads” do not prevail, and we descend into an abyss of escalating tariffs. Let’s also assume this leads to a material reshuffling of international trading partners worldwide. Would this scenario result in higher inflation and perhaps a slowing economy? More specifically, what would an all-out trade war do to stock prices and Treasury rates? Of course nobody knows the answer to this hypothetical question, but there is a real chance stock prices would decline, depending on the particular stock, and bond values would increase, sending yields lower, depending on the maturity of the bond.
Based on what we know now, we can reasonably assume the Fed will increase overnight rates at least once before year end, and probably twice. Two more increases of 25 bps would target an overnight rate of 2.50% and probably put the 2-year Treasury around 2.75% to 2.87%. But if the on-going flattening of the yield curve persists, the 10-year Treasury would most likely continue to trade below 3.0%, unless inflation goes unchecked. Who knows, maybe the dreaded, recession predicting “inverted yield curve” will prove right once again.
So, what’s a portfolio manager to do? Add longer bullets and higher yielding municipals to protect against the possibility of falling rates, and better yielding MBS with manageable duration and critical cashflow, if rates should rise or even stay the same.
As we pointed out yesterday, we like “seasoned” 15-year MBS pools with 3.5% coupons. As an example, the details of FN AL9063 are provided below:
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