Wednesday, July 3, 2019 |
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| 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 |
| 06/26/19 | 2.11 | 2.15 | 2.12 | 1.96 | 1.77 | 1.74 | 1.80 | 1.92 | 2.05 | 2.35 | 2.57 |
| 06/27/19 | 2.19 | 2.14 | 2.12 | 1.93 | 1.74 | 1.71 | 1.76 | 1.88 | 2.01 | 2.31 | 2.52 |
| 06/28/19 | 2.18 | 2.12 | 2.09 | 1.92 | 1.75 | 1.71 | 1.76 | 1.87 | 2.00 | 2.31 | 2.52 |
| 07/01/19 | 2.17 | 2.21 | 2.10 | 1.94 | 1.78 | 1.74 | 1.79 | 1.90 | 2.03 | 2.34 | 2.55 |
| 07/02/19 | 2.21 | 2.20 | 2.09 | 1.91 | 1.77 | 1.71 | 1.75 | 1.85 | 1.98 | 2.29 | 2.51 |
Portfolio Optionality into Declining Rates
Since the tax reform of 2018 municipals have become more of a focus for portfolio managers. Depending on your tax bracket, you may have been a seller or a buyer. When analyzing municipals for purchase or sale it is important to pay attention to the call features.
As interest rates increase, issuance costs increase as well, lowering the expected refinancing by municipalities. However, with the prospect of declining rates and current lower rates, issuers are more likely to execute these call features. Therefore, when buying into declining rates many portfolios would prefer longer call features and less optionality.
For example, most managers would prefer the Bowling Green MO bond if they were only considering YTM. However, the Jefferson IA bond is less likely to get called with a 3% coupon and has a higher yield to call.
As interest rates increase, issuance costs increase as well, lowering the expected refinancing by municipalities. However, with the prospect of declining rates and current lower rates, issuers are more likely to execute these call features. Therefore, when buying into declining rates many portfolios would prefer longer call features and less optionality.
For example, most managers would prefer the Bowling Green MO bond if they were only considering YTM. However, the Jefferson IA bond is less likely to get called with a 3% coupon and has a higher yield to call.
Into declining rates, it is particularly important to monitor not only your purchases’ call features, but to analyze your current portfolio’s cashflow structure as well. Modeling cashflow to the next call date or including a most likely maturity is recommended. Most likely calculations will take into account larger coupon holdings that are more likely to be called or refunded.
In declining rates, portfolio managers often have more cashflow than expected. If you are not performing this analysis on a regular basis, your portfolio may be a lot shorter than you think. In addition to simply assessing the amount of optionality in the portfolio, we also recommended to include additional cashflow from negatively convex products, such as MBS pools, which can also provide additional liquidity in declining rate environments.
Please feel free to call us if you would like additional product recommendations to better manage your portfolios optionality or increase the overall convexity in this lower rate market.
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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