Wednesday, December 28, 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 |
| 12/20/22 | 3.73 | 4.30 | 4.70 | 4.63 | 4.26 | 4.02 | 3.79 | 3.77 | 3.69 | 3.94 | 3.74 |
| 12/21/22 | 3.69 | 4.32 | 4.67 | 4.59 | 4.22 | 3.99 | 3.77 | 3.76 | 3.66 | 3.90 | 3.72 |
| 12/22/22 | 3.70 | 4.32 | 4.66 | 4.61 | 4.27 | 4.04 | 3.80 | 3.78 | 3.68 | 3.93 | 3.74 |
| 12/23/22 | 3.63 | 4.28 | 4.63 | 4.65 | 4.32 | 4.08 | 3.85 | 3.83 | 3.74 | 4.00 | 3.83 |
| 12/27/22 | 3.62 | 4.28 | 4.63 | 4.68 | 4.37 | 4.17 | 3.94 | 3.93 | 3.84 | 4.10 | 3.93 |
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 12/27/22
Preparing for 2023
In the past we have written about the long term debt cycle and interest rates. We continue to see a persistent inversion in the UST curve, both 2yr/10yr and 3m/10yr, which are indicating a high likelihood of recession in the near future.
Rationale
On a long-term basis, we continue to believe the market remains attractive to put money to work. Our analysis indicates the likely high in nominal yields this cycle could happen in Q2 or Q3 of 2023, though historically, we may have already seen the highs. Overall, we feel the US economy cannot sustain much more of an increase in interest rates without suffering, as the velocity has been so fast. A slower change in interest rates over a longer period could have been better for the market.
Historical Top in Interest Rates Following Inversion
During the last five cycles, the 2/10 UST curve inverted highs in yields occurred 0.3yrs to 1.5yrs after inversion with the average high occurring approximately 9 months after inversion. We have been in a sustained inversion since July of this year.
Strategy
Consider purchasing investments if possible. Loan demand will likely remain strong for the next 6-12 months, but we are likely falling into the traditional bankers trap: Never having money to invest at highs in yields and always money to invest at lows.
We recommend:
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Keeping new funding short and callable
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Sell short Muni’s <3yrs (pre-refunded are the most attractive, but others sectors are still well bid); Buy extended maturities (10yr+)
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Look for more bullet like structures (DUS / deep discount / Agency callables & Fixed- rate MBS / loan balance MBS)
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Consider selling Floaters and swapping into Fixed-rate product
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Add prepayment protection to new loans
Action
We recommend planning for tax loss swaps to execute in Jan 2023. You should be able to earn back a lion’s share of your loss within 12-24 months and set yourself up for long-term success. Selling in January gives you the most amount of time to earn back loss within calendar year. The longer you wait the harder the swap becomes.
Bond Losses vs. Coupon Income
The two ways you drive total return simplistically is coupon income and market-to-market movements. With limited coupon income all of the returns for bonds bought in 2020 and 2021 was largely driven by price movements, however this is now changed. You can book new purchases with coupons with yields in the 4-5% range.
Reasoning: If you buy in January with an approximate 5% coupon or book yield, you will get 5% of coupon income. Assuming you make a 5yr duration investment that means yields could go up another 100bps and you would still be even for the year (5% coupon income offsets 5% MTM movement 5yr duration x 1% higher interest rate = 5% loss MTM = 0% total return). If you wait until mid-2023 you can only afford ~50bps of upside before you show a negative total return in 2023. The longer you wait in 2023 the less margin of error you have on interest rate movements impacting your total return.
We are seeing our customers taking action now, as well as preparing to do so in January. Whether you need swap proposals, cash-flow analysis, or help rebalancing your investment portfolio, we are here to make sure you begin 2023 on the right foot.
Have a safe and very Happy New Year!
We recommend planning for tax loss swaps to execute in Jan 2023. You should be able to earn back a lion’s share of your loss within 12-24 months and set yourself up for long-term success. Selling in January gives you the most amount of time to earn back loss within calendar year. The longer you wait the harder the swap becomes.
Bond Losses vs. Coupon Income
The two ways you drive total return simplistically is coupon income and market-to-market movements. With limited coupon income all of the returns for bonds bought in 2020 and 2021 was largely driven by price movements, however this is now changed. You can book new purchases with coupons with yields in the 4-5% range.
Reasoning: If you buy in January with an approximate 5% coupon or book yield, you will get 5% of coupon income. Assuming you make a 5yr duration investment that means yields could go up another 100bps and you would still be even for the year (5% coupon income offsets 5% MTM movement 5yr duration x 1% higher interest rate = 5% loss MTM = 0% total return). If you wait until mid-2023 you can only afford ~50bps of upside before you show a negative total return in 2023. The longer you wait in 2023 the less margin of error you have on interest rate movements impacting your total return.
We are seeing our customers taking action now, as well as preparing to do so in January. Whether you need swap proposals, cash-flow analysis, or help rebalancing your investment portfolio, we are here to make sure you begin 2023 on the right foot.
Have a safe and very Happy New Year!
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