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Friday, April 25, 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
04/18/25 4.31 4.32 4.20 3.98 3.80 3.80 3.94 4.12 4.33 4.83 4.80
04/21/25 4.31 4.32 4.20 3.96 3.77 3.79 3.98 4.19 4.41 4.94 4.90
04/22/25 4.27 4.31 4.20 3.99 3.82 3.83 3.99 4.19 4.40 4.91 4.88
04/23/25 4.29 4.28 4.21 4.02 4.02 3.89 4.31 4.20 4.69 4.66 466
04/24/25 4.28 4.30 4.20 3.97 3.79 3.80 4.28 4.12 4.75 4.72 4.72

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 4/24/2025.

                                                                                                                                                                                        


Convexity – The 2nd Derivative Effect
 

Convexity is often a misunderstood and confusing concept in fixed income.  While most investors understand the concept of duration, which at a high level is the expected percentage increase or decrease in the price of a security if interest rates move 1%.  For example, if you had a 5yr duration bond and interest rates moved 1% we would expect a 5% change in the price of that security (Duration = 5 x 1% = 5% price change).  The higher the duration, typically the higher the price volatility. 

While duration is a great tool, it becomes less precise with larger moves in interest rates.  If we move 10bps, the duration calculation will be very close to actual price movements.  As interest rates change more dramatically, the change is price becomes more convex depending on the bonds structure.   Convexity measures the non-linear relationship of bond prices to changes in interest rates (i.e. the curvature of price movements).
 
 
This concept of convexity is extremely important to understand for bank portfolios.  A positively convex bond’s price rises more when rates fall and decreases less as rates rise.  A general rule of thumb is noncallable bonds are positively convex (UST or bullet), while callable bonds are typically negatively convex (single family MBS pools or callable USAG).  

Negatively convex bonds represent a two-sided risk.  If rates fall, the bond is called away from you and you are forced to reinvest at lower prevailing rates. However, if rates rise, the callable bond typically extends as the borrower chooses to keep the lower than market interest rate.

If rates never change, typically a callable bond would outperform a non-callable bond as we capture the spread premium for the call risk.  However, in practice, we all know the market is ever changing and will move.  This is why we would recommend investors look at not just the base case yield and spread of a MBS (or other negatively convex bond), but the range of outcomes and total returns.  Often you will find that a lower nominal yield and spread will outperform outside of the base case.  This is especially important to understand as you incorporate your interest rate bias. 

                        Source: Country Club Bank / Bloomberg

Please reach out to your Country Club Bank representative if you have questions or want to discuss further.
 

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