Friday, January 15, 2021 |
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MANAGING DIRECTOR: Scott Carrithers PORTFOLIO SALES AND SERVICE: George Morris • Chris Thompson • Sean Doherty • Kevin Doyle • Mark Tranckino Jeff Goble • Nicole Burczyk • Natalie Regan • Aaron Stoffer • David Farris • Lonnie Harris Brian Schaff • Josh Kiefer • Robert Schuyler • Tom Toburen • Aaron Hemphill |
| 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 |
| 01/08/21 | 0.08 | 0.08 | 0.09 | 0.10 | 0.14 | 0.24 | 0.49 | 0.81 | 1.13 | 1.67 | 1.87 |
| 01/11/21 | 0.09 | 0.08 | 0.10 | 0.10 | 0.14 | 0.22 | 0.50 | 0.84 | 1.15 | 1.68 | 1.88 |
| 01/12/21 | 0.09 | 0.09 | 0.09 | 0.11 | 0.14 | 0.23 | 0.50 | 0.83 | 1.15 | 1.68 | 1.88 |
| 01/13/21 | 0.09 | 0.09 | 0.10 | 0.12 | 0.14 | 0.22 | 0.48 | 0.80 | 1.10 | 1.63 | 1.82 |
| 01/14/21 | 0.09 | 0.09 | 0.09 | 0.10 | 0.16 | 0.23 | 0.49 | 0.82 | 1.15 | 1.69 | 1.88 |
Investment Options as the Curve Steepens
The 2yr v 10yr UST curve has steepened approximately 15 basis points (bps) since the start of the year. It is helpful to understand where the spread is relative to long-term averages. Currently, the spread is at roughly 96bps near its historic average of 90bps. With the prospect of increased stimulus spending, weakening US Dollar, and the Fed’s statements on keeping short-term rates lower for a longer period of time, we believe the risks are skewed toward further widening of the 2/10 spread. If you agree that the curve could steepen further, we would recommend several ideas to consider for your portfolio repositioning.
Source: Bloomberg
- Locking in gains – If you have long duration investments (particularly lower coupons), now is a great time to lock in those gains. Any above average coupon (2.5% or higher) MBS is likely to continue to experience elevated prepayments for the next several months as prepayments persist (sell at a gain vs receiving principal back at par via a prepayment).
- Short cash flow investments – If you have excess cash balances, or money to put to work if you decide to take gains, we continue to remain defensive on repositioning these balances. 10yr 1.5% or hybrid ARMs continue to be our favorite investments. If you are looking for yield or duration, look to high coupon kicker munis as defensive structure in the event rates do rise.
Over the long-term, we believe the worst investment you can make is to leave your excess balances in cash as this will continue to erode earnings. Short 10yr product can provide an incremental 50bps+ of yield with limited extension risk.
- Lock in cheap long-term funding now – While brokered CDs rates are no longer at all-time lows, they are still a historically cheap source of funds. Locking in long-term funding now at today’s levels will increase the ability to improve NIM when rates rise in the future.
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