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Friday, November 30, 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 |
| 11/23/18 | 2.25 | 2.41 | 2.52 | 2.67 | 2.81 | 2.83 | 2.88 | 2.97 | 3.05 | 3.21 | 3.31 |
| 11/26/18 | 2.24 | 2.41 | 2.54 | 2.70 | 2.84 | 2.86 | 2.90 | 2.98 | 3.07 | 3.22 | 3.32 |
| 11/27/18 | 2.31 | 2.41 | 2.53 | 2.70 | 2.83 | 2.86 | 2.89 | 2.98 | 3.06 | 3.22 | 3.32 |
| 11/28/18 | 2.31 | 2.40 | 2.53 | 2.69 | 2.81 | 2.84 | 2.87 | 2.97 | 3.06 | 3.23 | 3.34 |
| 11/30/18 | 2.31 | 2.37 | 2.52 | 2.69 | 2.81 | 2.83 | 2.85 | 2.94 | 3.03 | 3.21 | 3.33 |
Source: U.S. Department of the Treasury, as of 11/29/2018
Play Good Defense with Municipal "Kicker" Bonds
As discussed in our report yesterday, Chairman’s Powell’s remarks on Wednesday suggested that pausing rate hikes in 2019 is much more likely. One more rate increase in December is still a pretty sure bet, but after that, the direction of rates in 2019 is the subject of much debate.
Whether in a rising or falling rate environment, “kicker” bonds can provide a great defensive mechanism. The characteristics of a “kicker” are higher coupons and shorter call features, thus presenting the opportunity for the yield to “kick” up each year after the call date assuming the call is not exercised. Because of the optionality, kickers are generally priced to offer a nice yield pick-up over comparable non-callable bonds, both to the call and to maturity. And here’s the real kicker (get it?): If rates rise, you reap the reward of the higher than market book yield and your higher coupon bond will be more price defensive than a lower coupon bond; if rates fall, your bond will likely get called, but you have benefitted from a higher than market book yield to the call date.
Consider the following tax-exempt bank qualified “kicker” with a 5 year call:
Whether in a rising or falling rate environment, “kicker” bonds can provide a great defensive mechanism. The characteristics of a “kicker” are higher coupons and shorter call features, thus presenting the opportunity for the yield to “kick” up each year after the call date assuming the call is not exercised. Because of the optionality, kickers are generally priced to offer a nice yield pick-up over comparable non-callable bonds, both to the call and to maturity. And here’s the real kicker (get it?): If rates rise, you reap the reward of the higher than market book yield and your higher coupon bond will be more price defensive than a lower coupon bond; if rates fall, your bond will likely get called, but you have benefitted from a higher than market book yield to the call date.
Consider the following tax-exempt bank qualified “kicker” with a 5 year call:
Current market rates for a comparable five-year tax-free municipal are roughly 2.35-2.40, so the 3.10 yield to call on this bond provides a 70-75 basis point pick-up over current yields. You will amortize the 4.139 point premium to PAR and assuming the bond does not get called, you will then have a 4.00% @ PAR tax-exempt bond on your books.
Please let us know if you have interest in this strategy or if we can help with any of your portfolio needs.
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