| Wednesday, January 22, 2025 |
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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 |
| 01/14/25 | 4.31 | 4.31 | 4.32 | 4.21 | 4.37 | 4.47 | 4.60 | 4.71 | 4.79 | 5.06 | 4.98 |
| 01/15/25 | 4.29 | 4.31 | 4.30 | 4.17 | 4.27 | 4.34 | 4.45 | 4.55 | 4.65 | 4.95 | 4.88 |
| 01/16/25 | 4.30 | 4.30 | 4.30 | 4.17 | 4.23 | 4.30 | 4.40 | 4.51 | 4.61 | 4.93 | 4.86 |
| 01/17/25 | 4.31 | 4.30 | 4.31 | 4.21 | 4.29 | 4.35 | 4.43 | 4.53 | 4.63 | 4.93 | 4.86 |
| 01/21/25 | 4.31 | 4.31 | 4.31 | 4.19 | 4.28 | 4.32 | 4.40 | 4.49 | 4.58 | 4.89 | 4.81 |
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 1/21/2025.
Where Do You Think Rates Are Heading?
We’re not taking a poll with today’s title…more of a question posed for your reflection. Having a conviction regarding the direction of future interest rates is important for any banker because it will influence overall balance sheet strategy. Currently, the street’s base case expectation is the Fed will take a brief pause from rate cuts and then restart later in 2025. This would likely result in the yield curve inching lower and getting steeper.
That scenario might end up coming true. However, things rarely go as planned, especially regarding Fed policy, so today we are going to outline two investment strategies. One strategy for bankers who believe rates will fall hard, and one meant for those convinced yields will hang tight or move higher.
That scenario might end up coming true. However, things rarely go as planned, especially regarding Fed policy, so today we are going to outline two investment strategies. One strategy for bankers who believe rates will fall hard, and one meant for those convinced yields will hang tight or move higher.
If you are a bull:
Strategy Option:
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Lock in today’s high yields
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Extend portfolio duration to higher end of policy threshold
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Limit freely prepayable options
Product Preference:Treasury Notes (longer)
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Discounted agency callable bonds
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Discounted agency MBS (fixed rate & hybrid ARM)
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"Tight window" fixed rate CMBS (FNMA DUS & FHLMC multi PC)
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Municipals
Why?
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This strategy will provide steady income over next several years with little principal being returned to invest at lower rates
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Positive price action will allow you to harvest gains if needed
The return & risk profile of implementing this strategy could look similar to this:
Summary:
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The strategy can expect to yield 5% in all scenarios. Based on price volatility, the interest rate risk is comparable to buying a 5yr Treasury.
If you are a bear:
Strategy option:
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Prefer amortizing products and those with freely prepayable options – this cash flow will be reinvested into higher rates
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Shorten duration
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Add floating rate securities
Product Preference:
- Treasury Notes (shorter)
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Current or premium coupon MBS (especially hybrid ARM)
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Monthly SOFR floaters (FNMA SARM, FHLMC PC, CMO)
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Municipals – prefer defensive, “kicker” coupons
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“Cushion” agency callable bonds
Why?
- This strategy will provide healthy nominal yield that will improve as rates rise
- Lower the market value impact of higher rate moves
The return & risk profile of implementing this strategy could look similar to this:
Summary:
- This strategy expects to yield 5.20% in the base case and will improve as rates go higher. Due to negative convexity, interest rate risk is similar to a 3yr to 5yr Treasury depending on the rate shock. At each higher interest rate shock, it will earn a spread well over 100 bps over a comparable Treasury today.
We hope today’s PMR is a good reminder that effective portfolio management requires a future interest rate bias and matching strategy to go with it. Please reach out to your CCB CMG representative to discuss the appropriate investment approach to match your unique situation and conviction.
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