Thursday, April 29, 2021 |
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MANAGING DIRECTOR: Scott Carrithers PORTFOLIO SALES AND SERVICE: George Morris • Chris Thompson • Sean Doherty • Kevin Doyle • Mark Tranckino Jeff Goble • Nicole Burczyk • Natalie Regan • Aaron Stoffer • David Farris • Lonnie Harris Brian Schaff • Josh Kiefer • Robert Schuyler • Tom Toburen • Aaron Hemphill |
| 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 |
| 04/22/21 | 0.02 | 0.03 | 0.04 | 0.06 | 0.16 | 0.32 | 0.81 | 1.24 | 1.57 | 2.13 | 2.24 |
| 04/23/21 | 0.01 | 0.03 | 0.03 | 0.07 | 0.16 | 0.34 | 0.83 | 1.26 | 1.58 | 2.14 | 2.25 |
| 04/26/21 | 0.02 | 0.03 | 0.04 | 0.06 | 0.18 | 0.35 | 0.85 | 1.27 | 1.58 | 2.13 | 2.24 |
| 04/27/21 | 0.01 | 0.01 | 0.04 | 0.06 | 0.17 | 0.36 | 0.88 | 1.32 | 1.63 | 2.18 | 2.29 |
| 04/28/21 | 0.01 | 0.01 | 0.04 | 0.05 | 0.17 | 0.35 | 0.86 | 1.31 | 1.63 | 2.19 | 2.29 |
Buy 15 Year 1.00% Mortgage Pools at a Discount
One of the best ways to offset premium mortgage pools in your investment portfolio is to add discounted pools. Discounted mortgage pools will help to minimize pre-payment risk, but can also add a level of comfort when it comes to extension risk. Pools purchased at a discount will actually have an improvement in yields if speeds (pre-payments) pick up. What a great offset to the premium pools that can have a negative yield if speeds (pre-payments) are faster than anticipated. Another reason to consider adding 15 year pools is the extension risk protection.
Below is an example of a 15 year Freddie Mac mortgage pool with a 1.00% coupon. Mortgage holders have a WAC, or weighted average interest rate, of 1.857%. Rates would have to fall considerably for this pool to be a candidate for refinancing. As you can see below in the base case (0 MED) the average life is 5.2 years. In the column on the far left you will see that if rates move up by 300 basis points (+300 MED) the average life is 6.1 years. That is an extension of less than 1 year with rates moving up by 300 basis points. If rates do move lower and speeds pick up due to refinancing, the yields and spreads are not only positive in all categories but actually increase.
Below is an example of a 15 year Freddie Mac mortgage pool with a 1.00% coupon. Mortgage holders have a WAC, or weighted average interest rate, of 1.857%. Rates would have to fall considerably for this pool to be a candidate for refinancing. As you can see below in the base case (0 MED) the average life is 5.2 years. In the column on the far left you will see that if rates move up by 300 basis points (+300 MED) the average life is 6.1 years. That is an extension of less than 1 year with rates moving up by 300 basis points. If rates do move lower and speeds pick up due to refinancing, the yields and spreads are not only positive in all categories but actually increase.
Source: Bloomberg
Very consistent average life with minimal extension risk and a discount dollar price makes 15 year 1.00% pools a great choice to add to your existing mortgage portfolio.
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