Tuesday, March 27, 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 • Gus Koppen

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
3/19/18	1.70	1.80	1.99	2.08	2.31	2.45	2.65	2.78	2.85	2.97	3.09
3/20/18	1.76	1.81	1.97	2.08	2.34	2.49	2.69	2.82	2.89	3.01	3.12
3/21/18	1.71	1.74	1.95	2.06	2.31	2.46	2.69	2.82	2.89	3.01	3.12
3/22/18	1.67	1.72	1.95	2.05	2.29	2.43	2.63	2.76	2.83	2.94	3.06
3/23/18	1.69	1.74	1.92	2.04	2.28	2.41	2.61	2.74	2.82	2.94	3.06
3/26/18	1.71	1.79	1.94	2.06	`2.33	2.44	2.64	2.78	2.85	2.96	3.08

                                                                                      Source: U.S. Department of the Treasury, as of 3/26/18  

Are interest Rates destined to go up?
 
If you heard the comments from the new Fed Chairman Jerome Powell last week, you might expect “interest rates” to increase into the foreseeable future (whatever that is).
The expectation is that the Fed will raise at least 2 more times (to a 2.25% overnight rate) and possibly 3 times this year. While that may be the case, it may not have the intended results, at least on the longer end of the curve.
 
The key metric for market watchers is not the Fed Funds rate, used to set monetary policy, but rather the 10 year treasury rate which is supposed to reflect longer term inflationary expectations. The 10 year note hit a recent high of 2.94% on 2/21, and has steadily declined since, this morning the 10 year note is at 2.82%. One thing to watch is the shape of the curve. A flat or inverted curve typically signals lower rates ahead, not higher rates. So while the curve is currently NOT flat, it is flattening. At the end of September 2017, the 2 year treasury was 1.45% and the 10 year was at 2.24% indicating a spread of 79 basis points. This 2’s versus 10’s spread is currently 53 basis points.
 
Regression analysis still indicates a high probability of lower rates than higher rates, and while they are not predictors of when these reversions to the mean will occur, they are highly correlated.
 
Now is probably not the time to make a move to insulate your portfolio against the next move in rates, but it is worth keeping an eye on…
 
If you have some money to put to work, we still love this ARM (FH840772) as a relatively high current yield, and offers protection against higher rates (if the 10 year doesn’t react as anticipated).  Bonds like this near PAR will also insulate your portfolio against income deterioration due to amortizations expense.
 

                                                                                                                                                                                                  Source:  Bloomberg 03/27/18

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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