| Wednesday, August 3, 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 |
| 07/27/22 | 2.14 | 2.44 | 2.93 | 3.00 | 2.96 | 2.93 | 2.82 | 2.83 | 2.78 | 3.26 | 3.03 |
| 07/28/22 | 2.20 | 2.42 | 2.90 | 2.93 | 2.85 | 2.81 | 2.69 | 2.69 | 2.68 | 3.23 | 3.02 |
| 07/29/22 | 2.22 | 2.41 | 2.91 | 2.98 | 2.89 | 2.83 | 2.70 | 2.70 | 2.67 | 3.20 | 3.00 |
| 08/01/22 | 2.22 | 2.56 | 2.96 | 2.98 | 2.90 | 2.82 | 2.66 | 2.64 | 2.60 | 3.12 | 2.92 |
| 08/02/22 | 2.22 | 2.56 | 3.00 | 3.09 | 3.06 | 3.02 | 2.85 | 2.82 | 2.75 | 3.22 | 3.00 |
Source: U.S. Department of the Treasury, as of 8/02/2022
Time to Extend Municipal Bond Duration
With Fed policy, recession debate, and an inverted treasury curve grabbing all the headlines, there is an incredible opportunity available to portfolio managers that is being largely overlooked. Quietly AA municipal bond yields in the 20 year range have nearly doubled since the first of the year. In fact, they have quadrupled since the beginning of 2021. But as loan demand has increased in most banks and bond portfolio losses have mounted, this opportunity has been ignored by most bond portfolio managers.
Source: Bloomberg 8/1/22
Shown above is a graph of the treasury curve versus the AA muni bank qualified curve out through 20 years. The inverted treasury curve is in sharp contrast to the steepness of the municipal curve as they intersect at the 9 year range. The key takeaway from this is that nominal bank qualified yields from 10 to 20 years exceed 100% of the treasury curve – an occurrence generally signaling value and a buying opportunity.
Are there other signs the market is flashing that signal it may be time to extend? Well, there would seem to be at least these four:
Are there other signs the market is flashing that signal it may be time to extend? Well, there would seem to be at least these four:
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Although having retreated somewhat from the June high in yields, 20 year bank qualified bonds still provide returns as high as they have had in years. In fact, 2013 is the last time yields were substantially higher. Even then it was short lived with highs never reaching 5.00%.
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The treasury yield curve is inverted and it’s a gradually steepening inversion. History tells us this usually leads to recession and lower rates. As of yesterday morning, the 2 year was inverted 32 basis points to the 10 year note. The 1 year and 6 month t-bills were inverted as well at -34 and
-24 basis points respectively.
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The 10 year regression analysis of the 2, 5, & 10 year treasury notes shows yields have reached +2 standard deviations from the mean. This indicates that yields are “relatively high” in the rate cycle and have a 96.4% probability of reverting to the mean. With the recent rally in treasury prices, it would appear that this mean reversion has already begun.
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The Fed Funds futures curve is currently signaling additional increases through the remainder of the year, peaking in the 1st quarter of 2023 followed by a gradual decline through the remainder of the year beginning in early 2nd quarter. Generally this would indicate recession is looming as well as lower interest rates.
Country Club Bank Capital Markets Group currently has available a varied inventory of bank qualified bonds in strong regional credits with yields both to maturity and to the call well in excess of 100% of the treasury curve. If you agree that it might be time to extend and lock in today’s rates, then just give us a call.
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