| Friday, July 15, 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 |
| 07/08/22 | 1.57 | 1.98 | 2.68 | 2.96 | 3.12 | 3.14 | 3.13 | 3.16 | 3.09 | 3.53 | 3.29 |
| 07/11/22 | 1.58 | 2.18 | 2.79 | 2.97 | 3.07 | 3.09 | 3.05 | 3.06 | 2.99 | 3.43 | 3.18 |
| 07/12/22 | 1.63 | 2.22 | 2.78 | 3.07 | 3.03 | 3.07 | 3.01 | 3.01 | 2.96 | 3.37 | 3.13 |
| 07/13/22 | 1.78 | 2.39 | 2.96 | 3.21 | 3.13 | 3.14 | 3.02 | 3.00 | 2.91 | 3.35 | 3.08 |
| 07/14/22 | 1.99 | 2.40 | 2.93 | 3.16 | 3.15 | 3.16 | 3.06 | 3.05 | 2.96 | 3.36 | 3.11 |
Source: U.S. Department of the Treasury, as of 7/14/2022
Short Reset Capless Floater
Are you looking for an investment option with limited price volatility due primarily to a Monthly coupon adjustment? While there are a few options available to bank portfolios, we tend to see customers focus on two main criteria: capless rate and/or spread. Those looking for capless floaters tend to gravitate to extremely high premium SBA floaters, while those looking for absolute spread tend to go with lower cap CMOs (or CMOs with esoteric collateral i.e. HECM loans).
We find both traditional security types have major pitfalls. High premium SBA pools are often shown using 8CPR or 10 CPR, but have paid dramatically higher over the life of the pool, which results in much lower Discount Margins (DM) while low cap CMO floaters risk being capped out. In a nutshell, both structures struggle to meet the objectives we originally purchased them for.
A floating rate structure we believe is worth considering is a Structured Adjustable Rate Mortgage “SARM” pool. These pools are the floating rate equivalent of a fixed rate FNMA Delegated Underwriting Service “DUS” pool. SARMs are typically backed by one multifamily housing complex and traditionally trade at slight premiums or discounts to par. The key risks for SARMs are early payoffs and wider discount margins. The offering shown below carries less risk given the sub par price (early prepay increases yield / DM) and above historical average Discount Margin. SARMs have traded in the +20 to +60 DM range making the following pool a very attractive opportunity.
While we understand that adjustable securities like the following are not widely understood, please feel free to reach out to us with any interest or thoughts.
We find both traditional security types have major pitfalls. High premium SBA pools are often shown using 8CPR or 10 CPR, but have paid dramatically higher over the life of the pool, which results in much lower Discount Margins (DM) while low cap CMO floaters risk being capped out. In a nutshell, both structures struggle to meet the objectives we originally purchased them for.
A floating rate structure we believe is worth considering is a Structured Adjustable Rate Mortgage “SARM” pool. These pools are the floating rate equivalent of a fixed rate FNMA Delegated Underwriting Service “DUS” pool. SARMs are typically backed by one multifamily housing complex and traditionally trade at slight premiums or discounts to par. The key risks for SARMs are early payoffs and wider discount margins. The offering shown below carries less risk given the sub par price (early prepay increases yield / DM) and above historical average Discount Margin. SARMs have traded in the +20 to +60 DM range making the following pool a very attractive opportunity.
While we understand that adjustable securities like the following are not widely understood, please feel free to reach out to us with any interest or thoughts.
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