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Tuesday, August 14, 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 |
| 8/7/18 | 1.96 | 2.06 | 2.23 | 2.45 | 2.68 | 2.76 | 2.84 | 2.92 | 2.98 | 3.06 | 3.12 |
| 8/8/18 | 1.93 | 2.06 | 2.24 | 2.44 | 2.68 | 2.77 | 2.83 | 2.92 | 2.96 | 3.05 | 3.12 |
| 8/9/18 | 1.91 | 2.06 | 2.25 | 2.44 | 2.64 | 2.74 | 2.80 | 2.89 | 2.93 | 3.01 | 3.08 |
| 8/10/18 | 1.92 | 2.05 | 2.23 | 2.42 | 2.61 | 2.68 | 2.75 | 2.82 | 2.87 | 2.96 | 3.03 |
| 8/13/18 | 1.93 | 2.06 | 2.22 | 2.42 | 2.61 | 2.68 | 2.75 | 2.82 | 2.88 | 2.97 | 3.05 |
Source: U.S. Department of the Treasury, as of 08/13/2018
A Bear Bond Market Lesson: Discounted Callables Have Value
US Agency bond investors have been known to assert that callable bonds are a “sucker play” and only serve the issuer’s purposes. The common criticism is “they get called when you want them to stick around and they stick around when you wish they’d get called.” As it happens, the larger discussion of the virtues and vices of callable bonds is a topic worthy of diligent dissection which, due to space considerations, will be reserved for another day.
But even the most cynical fixed income investor is likely to spy the inherent value in discounted callable bonds. The greater the discount, the greater the value and the more the price profile (and returns) mimic that of a bullet security. Any bond which can be paid off prior to maturity at 100-00 is said to be negatively convexed (callables, mortgages). This negative convexity is the characteristic which torments investors. A method of reducing negative convexity is to buy coupons which are either deeply OUT of the money (very likely NOT to be called) or deeply IN the money (very likely TO BE called). In both instances, the uncertainty of the call option is diminished and the stressed price profile will more closely resemble that of a bullet the further the price moves away from par. In the current market, discounted callables are numerous and so are the opportunities for attractive income with plain vanilla bonds.
We offer the following (*subject to price change or prior sale):
But even the most cynical fixed income investor is likely to spy the inherent value in discounted callable bonds. The greater the discount, the greater the value and the more the price profile (and returns) mimic that of a bullet security. Any bond which can be paid off prior to maturity at 100-00 is said to be negatively convexed (callables, mortgages). This negative convexity is the characteristic which torments investors. A method of reducing negative convexity is to buy coupons which are either deeply OUT of the money (very likely NOT to be called) or deeply IN the money (very likely TO BE called). In both instances, the uncertainty of the call option is diminished and the stressed price profile will more closely resemble that of a bullet the further the price moves away from par. In the current market, discounted callables are numerous and so are the opportunities for attractive income with plain vanilla bonds.
We offer the following (*subject to price change or prior sale):
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