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Thursday, March 1, 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 |
| 2/22/18 | 1.34 | 1.63 | 1.84 | 2.02 | 2.25 | 2.42 | 2.66 | 2.84 | 2.92 | 3.08 | 3.21 |
| 2/23/18 | 1.38 | 1.64 | 1.85 | 2.02 | 2.25 | 2.39 | 2.62 | 2.79 | 2.88 | 3.04 | 3.16 |
| 2/26/18 | 1.39 | 1.66 | 1.87 | 2.03 | 2.22 | 2.37 | 2.60 | 2.77 | 2.86 | 3.03 | 3.15 |
| 2/27/18 | 1.49 | 1.66 | 1.87 | 2.08 | 2.27 | 2.43 | 2.67 | 2.83 | 2.90 | 3.06 | 3.17 |
| 2/28/18 | 1.50 | 1.65 | 1.86 | 2.07 | 2.25 | 2.42 | 2.65 | 2.80 | 2.87 | 3.02 | 3.13 |
Source: U.S. Department of the Treasury, as of 2/28/18
Keeping Strategy Simple in a Not So Certain Market
Yesterday we pointed out that as rates march upward, MBS securities specifically FN or FHLM 10 and 15 year pools, are excellent sources of cash flow as the mortgages pay down. This cash flow is due to both scheduled amortization as well as unscheduled prepayments. If you looking to keep the duration short (less than five or so years) with good yield (2.81% or so) and include good cash flow, MBS pools are a solid option for you.
There are other ways to “build in” cash flow both through the loan and investment portfolios.
In terms of the investment portfolio, a tried and true way to build an effective “structure” is the basic cost-averaging ladder. We realize this is an ancient and simple methodology, but we also believe it works. For instance, if 60% of the portfolio is set to mature in the next five years, with the remaining 40% set to mature in the next five to ten years, you have access to a constant source of funds. These funds can be used to either reinvest in securities or fund loans. If rates do increase, you can reinvest the maturing cash flow to suit expectations at the time or take advantage of any particular yield curve anomaly that might occur. It pays to focus and develop a game plan for the maturity structure of your portfolio. This does require discipline. It is not always easy to continue reinvesting if rates appear really “low”, or if it “looks” as if rates are about to shoot up. We recommend you not attempt to time the market, stick to the discipline of building a ladder that fits the needs of your financial institution.
Secondly, the “mix” of the portfolio is critical. An investment portfolio should cash flow as well as include a mix of bullet agencies or treasuries. We believe the highest yielding and most beneficial portfolios usually have a large percentage of MBS pools, Bank Qualified Municipal bonds and agency bullets or treasuries. The mix all depends on your balance sheet.
Building cash flow in the loan portfolio depends on your market as well as your mindset as to how you want to structure the balance sheet. Without trying to state the obvious, keep in mind a five or ten-year fully amortizing loan produces far greater cash flow than a 20 year Am loan with a 10 year rate reset. The greater cash flow should also generate a lower rate for the borrower, which serves as incentive to do the deal.
Yesterday, we featured a 15 year FN 3.0% MBS, today we highlight a 15 year FG 3.5% coupon. This pool (attached below) features a higher coupon than in our example yesterday as well as a 3.00% yield with a duration of 4.4 years, and again, great cash flow (see details in offer sheet below).
Thanks, give us a call (800.288.5489) if we can help with this or any other securities to build your portfolio.
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