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Thursday, April 5, 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 • Gus Koppen

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
3/28/19 1.65 1.73 1.95 2.12 2.28 2.41 2.59 2.72 2.77 2.89 3.01
3/29/18 1.63 1.73 1.93 2.09 2.27 2.39 2.56 2.68 2.74 2.85 2.97
4/2/18 1.68 1.77 1.92 2.08 2.25 2.37 2.55 2.67 2.73 2.85 2.97
4/3/18 1.70 1.75 1.92 2.09 2.28 2.41 2.60 2.73 2.79 2.90 3.02
4/4/18 1.67 1.71 1.90 2.07 2.28 2.42 2.61 2.73 2.79 2.91 3.03

                                                                                      Source: U.S. Department of the Treasury, as of 4/4/18  



Casting-Out the Curve …
 
If you’re thinking interest rates are going to gradually grind higher, perhaps you should consider GNMA Hybrid ARMs with a short initial Reset Date.

The pool below has a fixed-rate coupon of 2.50% for the first 3 years.  The coupon will then be adjusted annually at the Reset Margin of 150 bps over the Index (subject to an Annual Collar of 100 bps).

Given the Index (the 1-year CMT) is currently 2.09%, and because the FOMC is expected to continue raising rates, the next coupon could  increase to 3.50% as of 4/1/21, the initial Reset Date.  With a purchase price of PAR, your book yield would also increase to 3.50%.  Potentially, the coupon (and book yield) could increase annually to 4.50%, 5.50%, 6.50% and 7.50%, the lifetime cap.

As you can see from the chart below, the initial “re-casting” of the coupon to 3.50% is 50 bps higher than the current yield of the 30-year Treasury bond – a long term yield, but with short term repricing. Additionally, there’s cash flow from prepayments (in a rising rate environment) and no risk based capital required.

GNMA Hybrid ARM POOL: G2MA5096
Coupon: 2.50%                                                                                      
Dollar Price: 100-00                                                                                  
First Reset Date: 4/1/21 (and annually thereafter)                               
Annual Coupon Collar: 1.00%                                                               
Reset Index: The 1-year CMT (Constant Maturity Treasury is 2.09%) 
Reset Margin: +150 bps over the 1-year CMT                                          
Life Cap: 7.50%                                                                                      
Yield to Average Life: 3.06%                                                               
Average Life: 5.31
Duration: 4.62                                                                                     
Maturity Date: 3/20/2048
Loans: 226
Geographic Mix:  California 20.1%, Texas 13.8%, Georgia 6.4%


Source: Bloomberg 4/4/18
 

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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