| Wednesday, August 17, 2022 | ||||||||
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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 |
| 08/10/22 | 2.24 | 2.65 | 3.13 | 3.26 | 3.23 | 3.13 | 2.93 | 2.86 | 2.78 | 3.27 | 3.04 |
| 08/11/22 | 2.24 | 2.62 | 3.08 | 3.25 | 3.23 | 3.16 | 2.98 | 2.94 | 2.87 | 3.38 | 3.15 |
| 08/12/22 | 2.23 | 2.63 | 3.13 | 3.26 | 3.25 | 3.18 | 2.97 | 2.92 | 2.84 | 3.34 | 3.12 |
| 08/15/22 | 2.27 | 2.72 | 3.13 | 3.23 | 3.20 | 3.14 | 2.91 | 2.86 | 2.79 | 3.31 | 3.10 |
| 08/16/22 | 2.26 | 2.70 | 3.12 | 3.26 | 3.25 | 3.19 | 2.95 | 2.90 | 2.82 | 3.31 | 3.11 |
Source: U.S. Department of the Treasury, as of 8/16/2022
What’s Your Next Move?
The year began with a normal sloping yield curve, higher yields as the term increased. This continued until the end of the first quarter, followed by a few inversions along with a steady increase in yields after Fed rate hikes and Russian invasion of Ukraine. While we have picked up over 250bps in certain tenors, inversions remain along the treasury yield curve. These inversions can often complicate the decision making process of portfolio managers.
Naturally, our eyes wander to higher yields. However, if you are looking to extend, the highest yields are unfortunately offered in the shorter maturities. An example would be the 2YR USTN, as it offers the highest yield on the curve at 3.33%. The 5YR is 30bps lower in yield and the 10YR 45bps lower. When investing, what should be considered is the economic outlook and your banks rate conviction in three to five years time.
If we take into consideration economic data, while some indicators are still positive, most point to a recession in the near future. If this does occur, the Fed could begin cutting the overnight rate as early as May 2023. This outcome is not likely to favor investors who purchase higher rate bonds with the shorter maturities. Enjoying a 3.33% could likely be short lived, only to be reinvested at a potentially lower rate when it matures and rates are headed lower. While we are still near the high in yields, with the high being in June, extending before any potential drop in rates could prove to be a fruitful decision.
Reminder: Look to other sectors when extending to get even more bang for your buck. Treasuries are the safest route and continue to be a safe haven for excess funds, but there are additional alternatives that offer significant spread over treasuries. With a few examples plotted on the curve below, municipals are a great bullet type option that take you further out the curve. MBS can also be a sound place to consider as well. We always recommend taking into consideration the cash flow component when it comes to MBS. Be aware of the dollar price and remember what happens to MBS pools when rates are falling – refinancing has never been easier for homeowners, so make sure premium isn’t on the line.
Let us know if we can help you in your decision.
Naturally, our eyes wander to higher yields. However, if you are looking to extend, the highest yields are unfortunately offered in the shorter maturities. An example would be the 2YR USTN, as it offers the highest yield on the curve at 3.33%. The 5YR is 30bps lower in yield and the 10YR 45bps lower. When investing, what should be considered is the economic outlook and your banks rate conviction in three to five years time.
If we take into consideration economic data, while some indicators are still positive, most point to a recession in the near future. If this does occur, the Fed could begin cutting the overnight rate as early as May 2023. This outcome is not likely to favor investors who purchase higher rate bonds with the shorter maturities. Enjoying a 3.33% could likely be short lived, only to be reinvested at a potentially lower rate when it matures and rates are headed lower. While we are still near the high in yields, with the high being in June, extending before any potential drop in rates could prove to be a fruitful decision.
Reminder: Look to other sectors when extending to get even more bang for your buck. Treasuries are the safest route and continue to be a safe haven for excess funds, but there are additional alternatives that offer significant spread over treasuries. With a few examples plotted on the curve below, municipals are a great bullet type option that take you further out the curve. MBS can also be a sound place to consider as well. We always recommend taking into consideration the cash flow component when it comes to MBS. Be aware of the dollar price and remember what happens to MBS pools when rates are falling – refinancing has never been easier for homeowners, so make sure premium isn’t on the line.
Let us know if we can help you in your decision.
This fixed income sector snapshot is designed to give a quick look at key sectors and identify best value ideas as identified by our trading desk. The report is static as of the time it was pulled, so rates may have changed (treat as indication levels only as market may have moved). This information is intended for institutional investors only and pulled from sources we believe to be reliable. 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
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