by Natalie Regan
While each sector of the bond market operates / prices independently, we oftentimes compare offering levels to its equivalent treasury. This is usually in our minds as the barometer of value. Though it is good to keep in mind, these spreads don’t necessarily remain fixed as the treasury market fluctuates.
Tracking spreads once or twice a month in a few sectors is a good exercise and will be beneficial when it comes time to make a purchase for the portfolio.
While we have seen a nice run in rates this year on the treasury curve as a whole, the biggest jump in yields has been on the front end. This comes as a reaction to the Fed meeting last week. The FOMC statement and Powell’s comments during the press conference following, gave investors confidence that we could see more hikes than originally expected. The market has priced in about five moves for 2022. So far, other sectors of the market have repriced accordingly.
Sector analysis / spread update:
Agency bullets / callables: Agency bullets have ventured into positive spread territory. While there was little or no spread for quite some time, bullets now give an extra 2-7 basis points (bps) over the short end of the curve. Current coupon callables have become favorable again, as they usually do in a rising rate environment and currently offer +10 to 30 bps inside of 7 years.
Municipals: Tax-exempts (on a taxable equivalent basis) have been priced at little to negative spread over treasures. Tax free yields were at 60 to 70% of USTN on the short end for most of the last two years. The possibility of tax rates increasing, brought in more investors banking on the future taxable equivalent yields increasing in tandem with their tax bracket. Now the current 10 year ratio is 87% of USTN and is back in line with five year averages. Taxable levels have risen to the occasion and have been a great value in the 10ish year range as of late, offering upwards of 50+bps over USTN.
Reminder: We recommend not relying solely on rating - a quick credit analysis should be performed.
MBS: 10YR sector has been overvalued (minimal spreads: +5) for several months. 15YR new issues and slightly seasoned 1-2.5% (+16-28) appear to be the best value. 20YR 2% provide a good blend of yield / discounted dollar price and have very limited extension (+39).
We believe the overall best: 15YR 2% @ 1.81% / 4.7yr Avg Life / +21bps
20YR 2% @ 2.12% / 6.2yr Avg Life / +41bps
CDs: Issuance is essentially nonexistent at this point.
Call us to discuss in further detail / see specific offerings.
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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