Tuesday, November 7, 2017
MANAGING DIRECTOR: Scott Carrithers   PORTFOLIO SALES AND SERVICE: Steve Panknin • George Morris • Jeff Goble • Chris Thompson • Sean Doherty Robert Brickson • 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
10/31/17	.99	1.15	1.28	1.43	1.60	1.73	2.01	2.23	2.38	2.66	2.88
11/1/17	1.06	1.18	1.30	1.46	1.61	1.74	2.01	2.22	2.37	2.63	2.85
11/2/17	1.02	1.17	1.29	1.46	1.61	1.73	2.00	2.21	2.35	2.61	2.83
11/3/17	1.02	1.18	1.31	1.49	1.63	1.74	1.99	2.19	2.34	2.59	2.82
11/6/17	1.03	1.19	1.30	1.50	1.61	1.73	1.99	2.17	2.32	2.58	2.80

                                                                                                               

                                                                                                                Source: U.S. Department of the Treasury, as of 11/6/17   

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Consider DUS Bonds, at a Discount

Banks historically have shied away from adding multi-family collateral to their investment portfolios.  In fact, we have even highlighted some of the prepayment and collateral risks associated with CMBS securities in prior articles.  However, at a discount some of these risks become more muted. For example, in the FNMA DUS Pool offered below prepayment risks are minimized as the borrower would be required to pay a yield maintenance fee and the investor would be repaid at par.  

Comparatively, this multi-family pool is an attractive addition to a mortgage-backed portfolio due to the discounted price.  This would help reduce overall premiums within a portfolio, but also aid diversification from single-family collateral, which commonly the sole concentration found in bank investment portfolios.  DUS bonds can also be helpful in regulating cash flow with your mortgage portfolio, as many have a balloon structure, and prepayment penalties.  This asset class is expected to continue to grow, relative to the total Mortgage-Backed securities market, as more households are expected to rent instead of purchase homes. 

Below is a comparison between a bullet, multifamily pool and 20yr 3% pool.  The DUS pool offers ~23bps spread over a bullet with a similar final maturity.  Compared to a 20 year pool there is less extension risk, but a give up of ~10bps in yield. Thus, this bond would be suitable for an investor who could tolerate the longer duration, is looking for yield but does not want to take on additional extension risk in a rising 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