| Friday, July 22, 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 |
| 07/15/22 | 1.98 | 2.37 | 2.94 | 3.12 | 3.13 | 3.14 | 3.05 | 3.03 | 2.93 | 3.34 | 3.10 |
| 07/18/22 | 1.96 | 2.50 | 3.02 | 3.13 | 3.15 | 3.15 | 3.06 | 3.05 | 2.96 | 3.39 | 3.14 |
| 07/19/22 | 1.93 | 2.52 | 3.06 | 3.18 | 3.23 | 3.22 | 3.14 | 3.11 | 3.01 | 3.42 | 3.17 |
| 07/20/22 | 1.92 | 2.51 | 3.04 | 3.18 | 3.25 | 3.25 | 3.18 | 3.15 | 3.04 | 3.43 | 3.17 |
| 07/21/22 | 2.15 | 2.48 | 3.00 | 3.11 | 3.10 | 3.07 | 3.00 | 2.99 | 2.91 | 3.33 | 3.08 |
Source: U.S. Department of the Treasury, as of 7/21/2022
A Municipal Trader’s Perspective
A July 20 Bloomberg story was headlined “Short-Term Muni Bonds Hit Most Expensive Level Since 2020”. From a trader’s perspective, this has been quite evident over the past several months as we have seen the bids for short bonds in both the new issue and secondary market get more and more aggressive. An insatiable demand for short paper combined with new issue supply running nearly 10% behind last year has resulted in the ratio of short municipal yields to Treasury yields falling to below 50% in some instances.
We see this as an excellent opportunity to sell some of your shorter municipal holdings if you need liquidity and/or wish to pick up extra yield by selling one-three year paper and extending your duration. Just two days ago, we received a 1.815% bid on some AA general obligation bonds maturing August 15, 2023. With the one year Treasury note at 3.15%, that equates to a ratio of 57.6%, a percentage not seen in over two years, and quite candidly, a percentage that defies logic. Meanwhile, intermediate to long-term munis have strengthened slightly in relation to Treasuries but currently offer ratios above 85%. Earlier this week a number of AA rated competitive bank qualified issues came to market in 10 years at yields of 2.80-2.85%, equating to ratios of roughly 93% and taxable equivalent yields spreading more than 90 basis points over Treasuries for Sub-S banks.
As we anticipate the next rate hike by the Fed next Wednesday and the fears of recession hitting sooner than once thought, many market experts think we are close to or have already seen the peak in rates. As shown in the table below, a Bloomberg survey of over 40 fixed income analysts reveals their forecast for rates over the next ten quarters. The average of all the forecasts show the 2-year Treasury trading in a range of 3.01 to 3.41 and the 10-year trading in a range of 3.09 to 3.32 for the next 10 quarters, hardly a dramatic move from where we are currently. If those forecasts are accurate, the relentless demand for short paper will eventually abate and the bid will weaken. That is why we recommend selling short paper now while the unusually strong bid still exists. Please let us know if we can provide you with bid indications or swap proposals to enhance your portfolio return.
We see this as an excellent opportunity to sell some of your shorter municipal holdings if you need liquidity and/or wish to pick up extra yield by selling one-three year paper and extending your duration. Just two days ago, we received a 1.815% bid on some AA general obligation bonds maturing August 15, 2023. With the one year Treasury note at 3.15%, that equates to a ratio of 57.6%, a percentage not seen in over two years, and quite candidly, a percentage that defies logic. Meanwhile, intermediate to long-term munis have strengthened slightly in relation to Treasuries but currently offer ratios above 85%. Earlier this week a number of AA rated competitive bank qualified issues came to market in 10 years at yields of 2.80-2.85%, equating to ratios of roughly 93% and taxable equivalent yields spreading more than 90 basis points over Treasuries for Sub-S banks.
As we anticipate the next rate hike by the Fed next Wednesday and the fears of recession hitting sooner than once thought, many market experts think we are close to or have already seen the peak in rates. As shown in the table below, a Bloomberg survey of over 40 fixed income analysts reveals their forecast for rates over the next ten quarters. The average of all the forecasts show the 2-year Treasury trading in a range of 3.01 to 3.41 and the 10-year trading in a range of 3.09 to 3.32 for the next 10 quarters, hardly a dramatic move from where we are currently. If those forecasts are accurate, the relentless demand for short paper will eventually abate and the bid will weaken. That is why we recommend selling short paper now while the unusually strong bid still exists. Please let us know if we can provide you with bid indications or swap proposals to enhance your portfolio return.
Source: Bloomberg
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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