| Wednesday, March 8, 2023 |
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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 |
| 03/01/23 | 4.58 | 4.85 | 5.14 | 5.03 | 4.87 | 4.60 | 4.25 | 4.16 | 3.99 | 4.16 | 3.95 |
| 03/02/23 | 4.57 | 4.85 | 5.13 | 5.01 | 4.88 | 4.63 | 4.31 | 4.23 | 4.05 | 4.22 | 3.99 |
| 03/03/23 | 4.64 | 4.85 | 5.13 | 5.02 | 4.86 | 4.60 | 4.25 | 4.14 | 3.96 | 4.11 | 3.88 |
| 03/06/23 | 4.66 | 4.85 | 5.14 | 5.05 | 4.89 | 4.61 | 4.25 | 4.14 | 3.96 | 4.13 | 3.89 |
| 03/07/23 | 4.69 | 4.95 | 5.21 | 5.22 | 5.01 | 4.72 | 4.31 | 4.17 | 3.97 | 4.11 | 3.87 |
The data in the table above is static as of the time it was pulled, so rates may have changed. Treat all data in this table and PMR as indications only and availability is always subject to change.
This information was pulled manually from sources we believe to be reliable. New source, as of 12/12/2022, Bloomberg, LP. As of: close of business 03/07/2023
Agency Callable Rundown
More rate hikes appear to be on the horizon, and the “higher for longer” narrative has arrived. At least three more 25 basis point hikes are priced into markets, bringing the terminal Fed Funds rate to about 5.50%. Obviously, this is all subject to change, especially with all the volatility experienced over the past couple years, but we are receiving what appear to be clear signals from the Fed that their job is not complete.
As a result, Government Sponsored Agencies are offering high bond yields relative to Treasuries to hedge against the potential for even higher rates. Federal Home Loan Bank (FHLB), Freddie Mac (FHLMC) and Farm Credit (FFCB) have been printing coupons recently that nobody has seen in decades, now encroaching on and in some cases surpassing 7% (at a premium, resulting in lower yield).
There may be temptation to buy the highest coupons in the marketplace, but before you do there are a few things to keep in mind prior to purchasing a callable Agency bond:
In this inverted curve environment, our recommendation is to limit issuer optionality with extended initial lockouts and fewer potential call opportunities for the issuer. This ensures keeping your book yield on the balance sheet for as long as possible. Discount Agencies, which have a yield to worst priced to their final maturity, are another great way to navigate this market. “Worst case” is locking in yield for the full life of the bond, and any call juices the yield.
Country Club Bank underwrote the below FHLB Agency bond, which both limits issuer optionality and is offered at a discount.
As a result, Government Sponsored Agencies are offering high bond yields relative to Treasuries to hedge against the potential for even higher rates. Federal Home Loan Bank (FHLB), Freddie Mac (FHLMC) and Farm Credit (FFCB) have been printing coupons recently that nobody has seen in decades, now encroaching on and in some cases surpassing 7% (at a premium, resulting in lower yield).
There may be temptation to buy the highest coupons in the marketplace, but before you do there are a few things to keep in mind prior to purchasing a callable Agency bond:
- Prepare for the “worst case” scenario and view any higher yielding scenarios as a bonus
- Discount bond yields should be assumed to maturity
- Premium bond yields should be assumed to the earliest call date
- Assume optional calls will work in the Agency’s favor
- Be comfortable with the possibility of each call scenario playing out
In this inverted curve environment, our recommendation is to limit issuer optionality with extended initial lockouts and fewer potential call opportunities for the issuer. This ensures keeping your book yield on the balance sheet for as long as possible. Discount Agencies, which have a yield to worst priced to their final maturity, are another great way to navigate this market. “Worst case” is locking in yield for the full life of the bond, and any call juices the yield.
Country Club Bank underwrote the below FHLB Agency bond, which both limits issuer optionality and is offered at a discount.
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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