| Wednesday, February 21, 2024 |
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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 |
| 02/13/24 | 5.37 | 5.39 | 5.35 | 5.02 | 4.66 | 4.47 | 4.32 | 4.33 | 4.32 | 4.59 | 4.46 |
| 02/14/24 | 5.37 | 5.39 | 5.33 | 4.95 | 4.58 | 4.38 | 4.24 | 4.27 | 4.26 | 4.56 | 4.44 |
| 02/15/24 | 5.37 | 5.38 | 5.32 | 4.95 | 4.58 | 4.36 | 4.22 | 4.24 | 4.23 | 4.53 | 4.41 |
| 02/16/24 | 5.39 | 5.38 | 5.33 | 4.97 | 4.64 | 4.42 | 4.28 | 4.30 | 4.28 | 4.56 | 4.44 |
| 02/20/24 | 5.39 | 5.37 | 5.32 | 4.95 | 4.61 | 4.39 | 4.25 | 4.29 | 4.27 | 4.57 | 5.45 |
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, L.L.P. As of: close of business 02/20/2024.
Callable Bonds:
Very Different When Purchased at PAR / DISCOUNT / PREMIUM
Very Different When Purchased at PAR / DISCOUNT / PREMIUM
With the recent spike in yields all along the curve (see chart below), fixed income investors are, once again, seeing something which dominated bond pricing last year: DISCOUNT DOLLAR PRICES. And doesn’t everyone love a discount? It’s deep in the spirit to think discount means value. And many times it does. But that doesn’t mean premiums are trouble and par priced bonds are uninspiring. The topic is worth a quick study, especially when call options or freely prepayable features (MBS) are a part of the bargain.
US Agency bond investors have been known to assert that callable bonds are a “sucker play” and only serve the issuer’s purpose. The common criticism is “they get called when you want them to stick around and they stick around when you wish they’d get called.” But, even the most cynical fixed-income investor is likely to spy the inherent value in discounted callable bonds. The greater the discount, the greater the value, and the more the price profile (and return) mimics that of a bullet (aka: non-callable) security. Any bond which can be paid off prior to maturity at 100-00 is said to be negatively convexed (eg: govt, municipal & corporate bonds with specific call dates; MBS/CMOs). This negative convexity, which refers to the shape of the stressed price profile, is the characteristic which torments investors. A method of reducing negative convexity is to buy coupons which are either deeply OUT of the money (very likely NOT TO BE called) or deeply IN the money (very likely TO BE called). In both instances, the uncertainty of the call option is diminished and the stressed price profile more closely resembles that of a bullet bond. The further away from par (above or below) a bond’s price is, the more its price profile resembles a bullet.
In either case (discounts or premiums) your yield to worst will always be something higher than pure bullets (so the call option/prepay risk is acknowledged). Yield to worst is synonymous with “basis of trade” which identifies the specific yield an investor should expect. And here’s a rule to keep handy for bonds callable @ 100.00, with single coupons whether priced at par, discount or premium:
US Agency bond investors have been known to assert that callable bonds are a “sucker play” and only serve the issuer’s purpose. The common criticism is “they get called when you want them to stick around and they stick around when you wish they’d get called.” But, even the most cynical fixed-income investor is likely to spy the inherent value in discounted callable bonds. The greater the discount, the greater the value, and the more the price profile (and return) mimics that of a bullet (aka: non-callable) security. Any bond which can be paid off prior to maturity at 100-00 is said to be negatively convexed (eg: govt, municipal & corporate bonds with specific call dates; MBS/CMOs). This negative convexity, which refers to the shape of the stressed price profile, is the characteristic which torments investors. A method of reducing negative convexity is to buy coupons which are either deeply OUT of the money (very likely NOT TO BE called) or deeply IN the money (very likely TO BE called). In both instances, the uncertainty of the call option is diminished and the stressed price profile more closely resembles that of a bullet bond. The further away from par (above or below) a bond’s price is, the more its price profile resembles a bullet.
In either case (discounts or premiums) your yield to worst will always be something higher than pure bullets (so the call option/prepay risk is acknowledged). Yield to worst is synonymous with “basis of trade” which identifies the specific yield an investor should expect. And here’s a rule to keep handy for bonds callable @ 100.00, with single coupons whether priced at par, discount or premium:
- Basis of Trade for callable bonds priced at par may be either yield to maturity or call
- Basis of Trade for callable bonds priced at discounts will always be yield to maturity
- Basis of Trade for callable bonds priced at premiums will always be yield to call
Exercise your own call and dial up your CCB Capital Markets rep for more discussion and trade information.
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