| 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 |
| 02/25/20 | 1.59 | 1.53 | 1.47 | 1.30 | 1.20 | 1.16 | 1.16 | 1.25 | 1.33 | 1.63 | 1.80 |
| 02/26/20 | 1.59 | 1.53 | 1.42 | 1.26 | 1.16 | 1.14 | 1.14 | 1.25 | 1.33 | 1.64 | 1.81 |
| 02/27/20 | 1.56 | 1.45 | 1.33 | 1.18 | 1.11 | 1.08 | 1.11 | 1.22 | 1.30 | 1.61 | 1.79 |
| 02/28/20 | 1.45 | 1.27 | 1.11 | 0.97 | 0.86 | 0.85 | 0.89 | 1.03 | 1.13 | 1.46 | 1.65 |
| 03/02/20 | 1.41 | 1.13 | 0.95 | 0.89 | 0.84 | 0.85 | 0.88 | 1.01 | 1.10 | 1.46 | 1.66 |
Focusing on Coupons
As the bond market has rallied significantly over the last two weeks pushing the 10YR USTN to 1.12% currently, investors have been presented with a great opportunity to take gains in their portfolio. The idea of taking gains in a falling rate environment isn’t a new one, but the push behind it in certain sectors of the portfolio makes an even better case right now.
Mortgage Backed Securities (MBS) in most bank portfolios have some serious gains, especially if premiums have been amortized to the average life since the date of purchase. As bankers, we know new production and refinance rates have been dropping in accordance with the rest of the market. This will have a direct impact on higher coupon MBS holdings. As borrowers look to lock in lower rates paying off existing loans with higher rates, the prepayments on pools are going to ramp up significantly. As the refinancing rule has typically been while taking into consideration the cost of refinancing, if you can save 100bps or more on your refi rate, then it makes sense for the borrower. As you can see below, the Bank Rate 30YR refinance rates over the past 18 months have dropped almost 130bps.
The delay on prepayments speeds for MBS pools is 45-55 days so while we have our principal right now, it could start dwindling down at a much faster rate next month because of refinancings. Taking bigger gains on a larger principal amount now before the principal disappears is something worth taking into serious consideration. Looking at higher coupon MBS holdings is a great place to start. Call us if you would like to discuss your options.
As the bond market has rallied significantly over the last two weeks pushing the 10YR USTN to 1.12% currently, investors have been presented with a great opportunity to take gains in their portfolio. The idea of taking gains in a falling rate environment isn’t a new one, but the push behind it in certain sectors of the portfolio makes an even better case right now.
Mortgage Backed Securities (MBS) in most bank portfolios have some serious gains, especially if premiums have been amortized to the average life since the date of purchase. As bankers, we know new production and refinance rates have been dropping in accordance with the rest of the market. This will have a direct impact on higher coupon MBS holdings. As borrowers look to lock in lower rates paying off existing loans with higher rates, the prepayments on pools are going to ramp up significantly. As the refinancing rule has typically been while taking into consideration the cost of refinancing, if you can save 100bps or more on your refi rate, then it makes sense for the borrower. As you can see below, the Bank Rate 30YR refinance rates over the past 18 months have dropped almost 130bps.
The delay on prepayments speeds for MBS pools is 45-55 days so while we have our principal right now, it could start dwindling down at a much faster rate next month because of refinancings. Taking bigger gains on a larger principal amount now before the principal disappears is something worth taking into serious consideration. Looking at higher coupon MBS holdings is a great place to start. Call us if you would like to discuss your options.
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.
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