Looking for 5%? by Brian Schaff   Despite the recent rally in bonds, lower yields - higher prices, there are still opportunities to invest at 5% yields. The Treasury curve is a nice reflection on broader fixed income markets right now. The ability to get a 5% return past one year in Treasuries and Agency bullets might be gone, but there are other structures and products available to cross the threshold. As such, the question may not be “where can I get 5%” but rather “what are the most effective strategies at 5%”?   The graph above shows how the Treasury curve has shifted over the past few months. Most of the curve is down between 20-40 basis points since the beginning of July and 30-60 basis points since May. In many cases, the interest rates we’ve become comfortable with and accustomed to seeing are no longer available. However, the good news is rates are substantially higher when we view within the context of the rate environment over the last decade plus. Given the ability to grab 5% in quality bonds, this environment is still favorable to investors. Here are a few concepts we believe you should keep in mind when looking to capitalize on today’s market:    Tax-Free Municipal Bonds On tax-free and taxable municipal bonds, be careful about sacrificing credit quality or drifting out of your comfort zone on characteristics to pick up extra yield. Tax-free bonds, especially general market bonds, have the added cost of the TEFRA penalty to consider, but are generally the better investment for higher tax bracket (S Corp) banks if the bonds are Bank Qualified.  Product: 5.02% taxable equivalent yield to worst(S Corp) Bank Qualified Unlimited General Obligation Municipal Bond.   Taxable Municipal Bonds   Federally taxable municipal bonds can be advantageous for all investors, depending on the spread to comparable Treasuries. The same rules for credit quality and structure outlined above with tax-free municipals apply here as well. Product: Taxable 5% yield Unlimited General Obligation Municipal Bond.   Agency Callables 5% can be more easily found in Agency callable bonds, but most won’t offer sufficient call protection to keep yield on the books. The key here is finding the right balance between yield and limiting issuer optionality. Product: 5% coupon 5 year final / 1 year call Freddie Mac Agency callable at par. Callable only on an annual basis after one year of call protection.   Mortgage Backed Securities Good relative value on current market and below market coupon pools at discounts to par. If a falling rate environment continues, expect prepayment speeds to pick up. Discount pools can offer significant upside to comparable Treasuries when evaluated at faster speeds.  Product: Freddie Mac 30 year 5% coupon fixed rate pool. 1.5 point discount performs well on a yield and spread basis if rates come down and prepayments pick up. A couple months ago, 5% was abundant and could be found just about everywhere. Now, it’s still out there, but more thought and consideration is required when choosing a 5% investment. Don’t sacrifice quality or optionality to achieve this number. Even though rates continue to trend downward, there are still plenty of ways to improve the health of the investment 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