| Wednesday, May 15, 2024 |
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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 |
| 05/08/24 | 5.38 | 5.41 | 5.37 | 5.15 | 4.84 | 4.65 | 4.50 | 4.49 | 4.50 | 4.74 | 4.64 |
| 05/09/24 | 5.37 | 5.40 | 5.36 | 5.14 | 4.82 | 4.62 | 4.47 | 4.46 | 4.45 | 4.71 | 4.61 |
| 05/10/24 | 5.36 | 5.40 | 5.37 | 5.18 | 4.87 | 4.67 | 4.51 | 4.50 | 4.50 | 4.74 | 4.64 |
| 05/13/24 | 5.38 | 5.40 | 5.38 | 5.18 | 4.86 | 4.67 | 4.51 | 4.50 | 4.49 | 4.73 | 4.63 |
| 05/14/24 | 5.37 | 5.39 | 5.37 | 5.17 | 4.82 | 4.61 | 4.46 | 4.44 | 4.44 | 4.69 | 4.59 |
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 5/14/2024.
Weighing Investment Alternatives
The chart below shows three different investment alternatives, each with different risk and return profiles. Let’s examine what we believe are the positives and negatives of each.
Indications only, subject to change and availability without notice.
Bond 1 is a Fixed Rate 20yr Agency MBS. The yield is 5.27% at Base and is stable in the other interest rate scenarios due to the 5.50% fixed coupon on the bond and just a small premium. Another positive is that the bond gains 3.5% in value if rates go down -100 so there is some duration extension with this bond. The downside with this bond is its price risk to higher interest rates. It loses 5.3% in value +100 and 10.8% in value +200.
Bond 2 is a GNMA 5/1 ARM that is fixed for 5 years and then resets annually at the 1yr TSY +150. It has a 10% life cap and 1% periodic caps/floors. Taking into account the half point discount and calculating the yield at 10% CPR to the first reset is a Base Yield of 5.13%. The yield is stable in the other interest rate scenarios for the first 5 years of the bond due to the 5.00% fixed coupon and the slight discount. This bond gives up 14 bps in base yield to bond 1 but in return for the lower yield, this bond has lower price volatility. It loses only 3.2% +100 and 6.7% +200.
In addition, as bond 2 gets closer to first reset, the price volatility decreases as the bond gets close to resetting at a market rate. Bond 2 could also yield higher after the first reset. If the 1yr TSY stays at 5.16% where it is now, the coupon would reset to 6.00% at the first reset and then 6.64% 12 months after that. Projecting out these coupons and using Bloomberg’s BAM prepayment model calculates a Base Yield for Bond 2 of 5.30%. The 1.0% periodic caps/floors on bond 2 prevent the coupon from falling further than 4.0% at the first reset, protecting against a big move lower by the Fed.
Bottom line on bond 2 vs. the fixed rate is a lower yield up front but with less price risk initially and the pull to par feature of the rate resetting to a market rate, limiting price risk further down the road.
Bond 3 is a Fannie Mae SOFR Floater. It floats at SOFR +90 with an 8.0% life cap and resets monthly. This bond yields 6.24% at base and has no interest rate risk (price risk) except for when SOFR starts to move up towards the 8.0% life cap. With SOFR at 5.33% (bond coupon of 6.23%) it would take 7 25 bp raises by the Fed before this bond is capped out so this bond loses nothing +100 and then it loses very little value at +200.
The downside with this bond in addition to the life cap is if rates fall, the yield on this bond will fall as well so you are not getting any duration extension/price appreciation with this bond. The price will stay around 100.00. The -100 yield is 5.18% assuming SOFR drops with Fed Funds which it always has. If rates go up 100, the yield will increase to 7.28% and then to 8.00% if rates go up 200 bps.
In summary, bond 1 is good to extend portfolio duration and lock in a 5.27% yield today to protect against rates going down. Bond 3 is attractive if the Fed stays higher for longer, yielding 6.24% with no rate cuts and still yielding 5.18% after 4 rate cuts. Bond 2 is a good alternative as well for those that don’t want to extend duration as much with a fixed rate but also don’t want the risks associated with the floater.
For more information, please contact your Country Club Bank Capital Markets Group sales representative.
Thank You
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