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Barbell Strategy with Municipal Bonds and Floaters We believe longer-term municipal bonds continue to offer attractive returns. However, some buyers may not be willing to take four year or longer duration risk to take advantage of these opportunities. Employing a barbell strategy of longer-term fixed rate municipal bonds combined with floating rate securities provides the opportunity to still earn attractive spreads to treasury (TSY) while taking lower interest rate risk. Here are two securities to consider:
 Lines 4 and 8 in Exhibit 1 show the cumulative percent change in value for each respective security. Line 4 reflects the price risk profile of a bond that is called in 5 years in all the down rate scenarios as well as UP 100 bps. Up 200 and 300, the prices reflect the bond being outstanding until maturity as the price falls below 100.00. Line 8 shows the same for the floater. Note that there is very little price change for the floater until it starts to approach the 8% life cap up 200 and 300.
The combined cumulative percent change in value of each position is shown on line 11. By combining the short duration floater with the municipal bond, the interest rate risk of the position is cut in half from 4.05% to 2.11%, which is basically the same interest rate risk as a 2-year TSY note. The yields for each bond are on lines 12 and 13 with the blended yield on line 14, which shows a yield at base of 5.60%. That is a spread to the 2-year TSY of 1.86% (line 18), which we believe is an attractive return for taking 2-year duration risk. The losses increase up 200 and 300 (line 11) due to the municipal extending to maturity and the floater approaching the life cap. However, due to the 5.50% coupon on the municipal being outstanding longer and the coupon on the floater increasing, the Blended Yield on the position (line 14) also increases in the up-rate scenarios. Finally, credit risk is minimal because the floater is a FNMA bond and the municipal bond is rated AA+. 
For more information, please contact your Country Club Bank Capital Markets Group Sales Representative.  |
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.
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