| Wednesday, August 10, 2022 | ||||||||
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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 |
| 08/03/22 | 2.20 | 2.52 | 3.00 | 3.14 | 3.10 | 3.04 | 2.86 | 2.81 | 2.73 | 3.17 | 2.96 |
| 08/04/22 | 2.19 | 2.50 | 2.98 | 3.11 | 3.03 | 2.95 | 2.76 | 2.73 | 2.68 | 3.15 | 2.97 |
| 08/05/22 | 2.21 | 2.58 | 3.10 | 3.29 | 3.24 | 3.18 | 2.97 | 2.91 | 2.83 | 3.27 | 3.06 |
| 08/08/22 | 2.23 | 2.65 | 3.15 | 3.30 | 3.21 | 3.14 | 2.91 | 2.85 | 2.77 | 3.22 | 3.00 |
| 08/09/22 | 2.23 | 2.67 | 3.16 | 3.33 | 3.28 | 3.20 | 2.97 | 2.89 | 2.80 | 3.24 | 3.01 |
Source: U.S. Department of the Treasury, as of 8/09/2022
ANATOMY OF A RECESSION
Strong employment payrolls and inflation data have captured both the fixed income and equity markets attention for most of this year. The latest inflation print this morning showed inflation slowing. This might take some pressure off the Fed to continue their aggressive hiking of interest rates. We believe the Fed should continue to raise rates AS LONG AS INFLATION REMAINS AT 40 YEAR LEVELS.
There are, however, indicators that the economy is exhibiting risks to the downside. They include:
There are, however, indicators that the economy is exhibiting risks to the downside. They include:
- Construction spending declined for the second consecutive month, (.1% followed by 1.1%)
- Real weekly earnings fell 4.4%.
- Housing starts declined by 2.0%.
- Texas Manufacturing Outlook Activity (Dallas Fed) fell by 22.6%.
- Existing home sales dropped by 5.4% and pending home sales fell YoY by 19.8%.
Speaking of home sales, the U.S. supply of new homes relative to sales in June was the highest since the midst of the last crash in 2010. Although the U.S. still suffers from a shortage of homes, builders will wisely not gamble on building new homes in a recessionary environment.
Of course the most powerful historic indicator is the inversion of the yield curve. The 2 to 10 year Treasury curve has slowly inverted to its current level of negative 48 basis points. As you can see from the Bloomberg (source) chart below, that is the steepest inversion of this century.
Of course the most powerful historic indicator is the inversion of the yield curve. The 2 to 10 year Treasury curve has slowly inverted to its current level of negative 48 basis points. As you can see from the Bloomberg (source) chart below, that is the steepest inversion of this century.
For example:
FHLB 1% due 3-23-2026, priced at par in March of 2021, now selling at 92.05.
Its yield to representative call dates:
Its yield to representative call dates:
- If called in 1 year, (August 2023) your holding yield is 9.21%
- If called in two years, (August 2024) your holding yield is 5.16%
- If called in August 2025, (only 5 months before maturity) your holding yield is 3.80%
- Finally, your 3.35% yield to maturity is approximately 25 basis point spread to treasuries or about 5 times that of a straight bullet.
Remember, this bond is callable monthly but we would need to revert back to close to a zero overnight rate environment for the call to be utilized, so for all practical purposes, a bullet. With a final maturity of 3.5 years it looks like a great spot to lock in a rate that will likely outperform the average overnight yield over that timeframe.
Please let us know if you have questions or interest.
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