Thursday, July 23, 2020 |
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| MANAGING DIRECTOR: Scott Carrithers PORTFOLIO SALES AND SERVICE: Steve Panknin • George Morris • Jeff Goble • Chris Thompson • Sean Doherty Kevin Doyle • Lonnie Harris • Mark Tranckino • Robert Schuyler • Tom Toburen Josh Kiefer • Nicole Burczyk • Natalie Regan • Aaron Stoffer • David Farris |
| 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 |
| 07/16/20 | 0.12 | 0.11 | 0.13 | 0.14 | 0.16 | 0.17 | 0.28 | 0.46 | 0.62 | 1.09 | 1.31 |
| 07/17/20 | 0.11 | 0.11 | 0.13 | 0.14 | 0.14 | 0.18 | 0.29 | 0.47 | 0.64 | 1.11 | 1.33 |
| 07/20/20 | 0.11 | 0.13 | 0.14 | 0.14 | 0.16 | 0.18 | 0.29 | 0.47 | 0.62 | 1.10 | 1.32 |
| 07/21/20 | 0.09 | 0.13 | 0.13 | 0.15 | 0.14 | 0.17 | 0.27 | 0.45 | 0.61 | 1.09 | 1.31 |
| 07/22/20 | 0.9 | 0.13 | 0.14 | 0.14 | 0.14 | 0.17 | 0.27 | 0.45 | 0.60 | 1.08 | 1.29 |
Source: U.S. Department of the Treasury, as of 07/22/2020
Defensive Investing
Yesterday’s PMR suggested commercial bankers concerned about higher inflation in the long run should simply opt for shorter duration securities or, if considering higher yields from longer duration securities, should opt for the more defensive structures.
Given that interest rates are at all-time record lows, fixed income investors might want to resist locking-into current yields with long durations. Of course short duration securities offer very little yield, but importantly, they avoid much higher levels of interest rate risk. These less risky short term options include the following:
Defensive Investing
Yesterday’s PMR suggested commercial bankers concerned about higher inflation in the long run should simply opt for shorter duration securities or, if considering higher yields from longer duration securities, should opt for the more defensive structures.
Given that interest rates are at all-time record lows, fixed income investors might want to resist locking-into current yields with long durations. Of course short duration securities offer very little yield, but importantly, they avoid much higher levels of interest rate risk. These less risky short term options include the following:
- Short maturity Treasury and Agency bullet securities
- Short maturity Agency debentures that are callable
- Short maturity tax-exempt and taxable municipals
- Short maturity MBS pools with steady cash flows
- Hybrid MBS ARMS with cash flows that typically accelerate
- Agency issued Floating Rate Notes (FRNs) tied to SOFR
- Short maturity CMBS K-Fred pools and FNMA DUS bonds
- Floating rate CMBS K-Fred pools and FNMA DUS bonds
For any given maturity, tax-exempt municipal bonds continue to offer the highest yields available. If fixed income investors are contemplating higher yields with longer durations, they should consider the importance of coupon selection.
Below is a comparison of longer term municipal offerings with coupon rates that are 2.00%, 3.00% and 4.00%. Obviously, the lowest coupon offers more earnings upfront, but this comes with more interest rate risk. In the long run, rates could easily double, resulting in an extension beyond the call date and significant unrealized losses.
It’s also obvious the higher the coupon rate, the more likely the call, meaning investors wouldn’t receive the kick-up in earnings equal to the coupon beyond the call date. Investors, however, would be able to re-invest their principal at a time when interest rates are significantly higher.
Below is a comparison of longer term municipal offerings with coupon rates that are 2.00%, 3.00% and 4.00%. Obviously, the lowest coupon offers more earnings upfront, but this comes with more interest rate risk. In the long run, rates could easily double, resulting in an extension beyond the call date and significant unrealized losses.
It’s also obvious the higher the coupon rate, the more likely the call, meaning investors wouldn’t receive the kick-up in earnings equal to the coupon beyond the call date. Investors, however, would be able to re-invest their principal at a time when interest rates are significantly higher.
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