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Friday, February 23, 2024

Scott Carrithers
George Morris • Chris Thompson • Sean Doherty • Kevin Doyle • Mark Tranckino
Natalie Regan • Aaron Stoffer • David Farris • Lonnie Harris Brian Schaff Jeff Macy
Josh Kiefer • Robert Schuyler • Tom Toburen •  Todd Czinege

US Treasury Market

Date 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr
02/15/24 5.37 5.38 5.32 4.95 4.58 4.36 4.22 4.24 4.23 4.53 4.41
02/16/24 5.39 5.38 5.33 4.97 4.64 4.42 4.28 4.30 4.28 4.56 4.44
02/20/24 5.39 5.37 5.32 4.95 4.61 4.39 4.25 4.29 4.27 4.57 5.45
02/21/24 5.39 5.40 5.35 4.99 4.67 4.44 4.31 4.33 4.32 4.61 4.48
02/22/24 5.39 5.41 5.35 5.01 4.31 4.49 4.32 4.35 4.32 4.58 4.46

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 02/22/2024.

Are Adjustable-Rate-Mortgages Worth a Look?

Country Club Bank has long been a proponent of hybrid adjustable-rate mortgages “ARMs” in community bank investment portfolios.   We have found from an asset liability perspective hybrid ARMs are one of the best fits for a community bank balance sheet.

A few key characteristics are important to highlight with hybrid ARMs.

  1. Initial lockout period (fixed coupon rate) – 5yr / 7yr / 10yr lockout period for most new origination.
  2. Index + margin (this is how the coupon is reset after initial lockout period) – Typically 1yr constant maturity treasury “CMT” or 30-day average SOFR + a margin rate (margin varies between 150bps to 250bps). 
  3. Cap Structure (First Reset / Periodic Reset / Lifetime Max or Min) - Typical structures are 1/1/5, 2/2/5, 5/2/5.  For example, a 2/2/5 cap structure would mean the coupon can reset +/- 2% at the first reset from the initial coupon, then +/- 2% periodically thereafter. During the life of the security the coupon can not exceed a +/- 5% from initial coupon.  

Depending on where you are in the overall interest cycle, certain cap structures or initial lockout periods can warrant more interest.  For example, if we are at the low of an interest rate cycle and rates rise in the future, the best structure to own is the shortest initial lockout period + the highest first reset cap.   

Currently, the regression model on a long-term horizon would indicate we are at or near a top in this interest rate cycle.  If you believe rates have likely topped, we would recommend adding current market coupons (~5%) with a lower first reset cap (1% or 2% and avoid a 5%).

Below is a current 5yr initial lockout period GNMA ARM.  This 5yr GNMA arm carries a 1/1/5 cap structure with a 5% initial coupon.  In 62 months the coupon can reset +/- 1% (4% to 6% range) so if rates fall, especially if they fall more than 100bps, this ARM should outperform.  This arm provides nice optionality if we are wrong and rates remain higher. The coupon can reset up to 6% while extending less than an equivalent fixed rate 15yr pool typically would.  

Why We Like
  • Lock in a 5% initial coupon at slight discount to par
  • 5.39% yield at 20 CPR
  • 5.28% yield according to BAM model

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