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Tuesday, September 11, 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
9/04/18 2.00 2.13 2.29 2.49 2.66 2.73 2.78 2.85 2.90 2.99 3.07
9/05/18 2.00 2.14 2.30 2.49 2.66 2.72 2.77 2.85 2.90 3.00 3.08
9/06/18 1.98 2.13 2.30 2.50 2.64 2.71 2.76 2.83 2.88 2.98 3.06
9/07/18 1.98 2.14 2.30 2.53 2.71 2.78 2.82 2.89 2.94 3.03 3.11
9/10/18 1.98 2.14 2.32 2.54 2.73 2.78 2.83 2.89 2.94 3.02 3.09
                                                                                                                                       Source: U.S. Department of the Treasury, as of 09/10/2018


Barbell Strategy: Cash Flows for the Short End
 
In today’s marketplace there are two prevailing (and conflicting) thoughts regarding the future path of interest rates:  1. Rates will rise across the curve as the FED continues to tighten, the deficit continues to expand and inflation continues to quicken, 2. Rates will drop across the curve as the FED over tightens, inflation remains muted and the curve soon inverts and leads us into recession.

No one knows for certain the future path of interest rates so prepare for both scenarios. Our Capital Markets Group continues to advocate the barbell investment strategy at this point in the rate cycle.  Weight the majority of dollars to the short end in cash flow and liquid securities.  Invest the remainder in longer duration, higher yielding bonds for additional income.  After all, there is still a budget projection to meet.

Shown below for your consideration is a seasoned 15 year 3.5% FNMA pool.  With a yield of 3.08%, duration of 3.69 and very minimal extension in the +300 rate scenario, this bond is a cash flow machine.


Source: Bloomberg   As of 9/10/18

As you can see from the cash flow table below, roughly 55% of the principal is expected to be returned within the first four years.  This bond offering is tailor made for the short end of the barbell investment strategy. 


Source: Bloomberg   As of 9/10/18

 

 


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.

•Not FDIC Insured •No Bank Guarantee •May Lose Value