Portfolio Managers Report: Structure That Has Outperformed 05/14/25

Wednesday, May 14, 2025
MANAGING DIRECTOR: Scott Carrithers PORTFOLIO SALES AND SERVICE: Chris Thompson • Sean Doherty • Mark Tranckino • Brian Schaff Natalie Regan • Aaron Stoffer • David Farris • Jeff Macy Josh Kiefer • Todd Czinege • Trey Valentine • Cody Kreutziger

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
05/07/25	4.28	4.32	4.22	4.01	3.78	3.75	3.86	4.05	4.27	4.78	4.77
05/08/25	4.29	4.33	4.25	4.07	3.88	3.86	3.99	4.17	4.38	4.87	4.85
05/09/25	4.28	4.32	4.24	4.06	3.89	3.88	4.00	4.18	4.38	4.86	4.84
05/12/25	4.31	4.39	4.25	4.12	4.01	4.01	4.11	4.29	4.47	4.93	4.91
05/13/25	4.32	4.38	4.25	4.12	4.00	4.00	4.09	4.28	4.47	4.94	4.91

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 5/13/2025.

Structure That Has Outperformed

Performance is the execution of an action. Outperforming is the act of producing a better result than what was expected. In a bank balance sheet, there are assets that perform better than others. In the loan portfolio, many bankers like having the structure of a variable rate loan, but oftentimes want a portion of that loan to be fixed for a period of time. This allows for a period of consistent yield followed by a yield that tracks with current market conditions. If we can achieve this in the bond portfolio, it would allow for a portfolio that doesn’t get too far away from current market rates. That structure does exist and many banks have participated in it as we see in the chart below:

Many banks on the BancPath system are just like most banks in the country and haven’t participated in the bond market much over the past couple of years. Due to the lack of participation, we are able to see very clearly the segments of the portfolio that “outperformed” other segments in this most recent rate cycle. The MBS ARM category is typically a hybrid structure that is a fixed coupon for a period of time, typically five to seven years, followed by a floating rate tied to SOFR or treasuries. We have written about this segment of the market in the past. However, this illustration may be the clearest representation of the outperformance over longer periods of time that we are able to illustrate.

The bond market is currently giving us what we believe might be the best opportunity to put a structure like this on our balance sheets at unprecedented pricing. Finding this structure is typically more difficult to source as most banks hold the loans that provide this structure on their balance sheets instead of selling them to the secondary market to be packaged. So, when this option is available, we think it should be seriously considered to be part of most bank’s investment portfolio.

Take a look at the deep discount ARM MBS pool shown below. This pool has a 5/1/5 cap structure, which means that it can reset 500 bps higher than the current coupon at the first reset in 44 months, followed by 100 bps resets on a semi-annual basis, for a 500 bps lifetime cap over the current coupon. The pool is priced on SOFR30A plus 226.9 bps. When the market was providing two and three percent coupon mortgages, we saw 5/1 arm mortgages with a two percent handle as well. This has created a situation with a deep discounted variable rate asset that we haven’t seen in the past, which seems like a great opportunity to take advantage of this market segment.

If you have interest in a structure that tends to “outperform”, please let us know and we can help find a solution.

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