Opportunities Along the Curve
by Natalie Regan
The general consensus in speaking with bankers is that most are still awash with cash. Though loan demand may have recently picked up slightly, most are not at normal Loan to Deposit ratios. This could continue for the foreseeable future with PPP payoffs continuing to roll in through year end and potential economic activity slowing due to another spike in Covid, etc. Our markets have been reactive to both the events of the past and what it believes the future holds, but even with an increase in price there are plenty of opportunities to make good moves in the portfolio, 2021 earnings and beyond.
With the overall rally across all fixed income, bank budgets could be tested. This is a point in time when rash decisions can be made. There are good, smart strategies that can be implemented given unforeseen market conditions.
The upside of a rally is the boost in unrealized gains in the bond portfolio. A little over halfway through the year is a good time to start thinking about year end planning and the possibility of realizing portfolio gains. While bond prices are so high, taking action earlier (rather than when it’s a pressing matter come mid-December) could produce larger gains. The appeal of taking gains sounds great to most until the reinvestment fear sets in.
Long term, we feel good about the trend of rates going higher due to the demand in almost all big ticket item spending sectors, i.e. homes and cars. As rates remain low, taking gains where yields have dropped the most and/or spreads have tightened dramatically is worth considering: 6-10 year US Treasuries, Agency bullets and municipals (both taxable and tax-free).
On the reinvestment side, staying short on the curve keeps access to liquidity high for when our market makes a turn. Short MBS pools are a great option to provide spread over the curve as well as having the cashflow component which is even more beneficial if/when rates do eventually rise. Another good sector to evaluate is the CD market. If your portfolio has not yet reached the FDIC insured limit on certain issuers, there are banks paying up to 50bps over Treasuries on 5yr terms.
If there is a need on the buy side, the sell side or both, please let us know how we can help.
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