Wednesday, February 7, 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

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
1/31/18	1.43	1.46	1.66	1.90	2.14	2.29	2.52	2.66	2.72	2.83	2.95
2/1/18	1.41	1.48	1.64	1.89	2.16	2.33	2.56	2.72	2.78	2.90	3.01
2/2/18	1.40	1.48	1.65	1.88	2.15	2.33	2.58	2.76	2.84	2.97	3.08
2/5/18	1.40	1.51	1.67	1.85	2.08	2.25	2.50	2.68	2.77	2.92	3.04
2/6/18	1.48	1.52	1.69	1.87	2.10	2.30	2.52	2.70	2.79	2.94	3.06

                                                                                      Source: U.S. Department of the Treasury, as of 2/06/18  

FNMA DUS - A MBS Pool with Stable Cashflow

Rates are rising.  A stock-in-trade strategy when rates are rising is to buy bullets of preferred duration.   The concept seeks to maximize both nominal yield (the higher rates) and total return (the benevolent price action when rates reverse course).   While this strategy is commonly executed with non-callable US Treasury and agency bonds, Mortgage Backed Securities (MBS) investors exercise the same strategy using a particular product with unusual prepayment properties. FNMA DUS (Delegated Underwriting and Servicing) mortgage-backed securities are comprised of multi-family properties with principal pre-payment protection (aka: yield maintenance provisions). 

A FNMA DUS bond typically has one underlying loan that is a thirty year term with a balloon payment in 5, 7 or 10 years.  While the bond is prepayable, it is NOT prepayable at par.  Rather, prepayments are made at premium to par by virtue of an onerous yield maintenance calculation.  Generally, this prepay penalty removes the borrower’s economic incentive to refinance when rates fall.  Thus, it has price action which resembles a bullet in a falling rate environment.  Each DUS bond lists the method of pre-payment provisions in the prospectus at the time of issue. 

While DUS bonds enjoy the same credit profile as any other FNMA MBS, Debt-Service Coverage Ratio (DSCR) and the Loan-to-Value Ratio (LTV) are published at inception to help investors analyze the underlying collateral.  FNMA classifies DUS bonds by credit in three tiers.  Tier 4 is the highest rating.

FN AM8714 is a DUS bond we like for portfolios seeking steady cashflow properties and price gain potential.  It has 32 months of seasoning with an original 10yr final and a remaining 7yr yield maintenance period.  Offered for February settlement near $98-22 to yield 2.92%, the WAL is 6.7yrs.  An earlier payoff prior to expiration of the yield maintenance period, shortens the WAL to 4.10yrs and produces a yield of 3.01%. 

Please call your CCB Capital Markets Rep for further analysis and other offerings, observations and assistance.

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