Wednesday, August 26, 2020 |
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| MANAGING DIRECTOR: Scott Carrithers PORTFOLIO SALES AND SERVICE: Steve Panknin • George Morris • Jeff Goble • Chris Thompson • Sean Doherty Kevin Doyle • Lonnie Harris • Mark Tranckino • Robert Schuyler • Tom Toburen Josh Kiefer • Nicole Burczyk • Natalie Regan • Aaron Stoffer • David Farris |
| 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 |
| 08/19/20 | 0.07 | 0.11 | 0.12 | 0.13 | 0.14 | 0.17 | 0.29 | 0.48 | 0.68 | 1.20 | 1.42 |
| 08/20/20 | 0.08 | 0.11 | 0.13 | 0.12 | 0.13 | 0.15 | 0.26 | 0.46 | 0.65 | 1.15 | 1.38 |
| 08/21/20 | 0.07 | 0.10 | 0.12 | 0.13 | 0.16 | 0.16 | 0.27 | 0.46 | 0.64 | 1.13 | 1.35 |
| 08/24/20 | 0.09 | 0.12 | 0.12 | 0.14 | 0.14 | 0.18 | 0.28 | 0.47 | 0.65 | 1.14 | 1.35 |
| 08/25/20 | 0.08 | 0.11 | 0.12 | 0.13 | 0.15 | 0.18 | 0.30 | 0.49 | 0.69 | 1.18 | 1.39 |
Source: U.S. Department of the Treasury, as of 08/25/2020
+90bps over 5YR USTN
With prices at historical highs, some portfolio managers have taken the route of (re)investing idle cash and portfolio roll-off into short term bonds with the hope rates will be higher as these funds come due. Thus investment decisions are being made based on term much more than nominal yield (and clearly so considering spreads are so narrow along the curve). With assistance from a global pandemic, yields collapsed in 2020. But with the promise of a vaccine, there is hope and the real possibility that normalcy may return to our daily lives, financial markets and economy. Of course this turnabout may not occur as quickly as the March decline, but markets are hopeful if not precise on the timing. Accordingly, buyers may look to “socially distance” their investments in a short term ladder. Low duration, plain-vanilla agency mortgage pools are well suited for that purpose. A perfect candidate is the fully amortizing 15yr Mortgage Backed Securities (MBS) with a 2.5% coupon, weighted average life of 5 years, steady cash flow behavior priced to yield well over 1% and 90bps of spread over the 5 year Treasury Note.
The specific pool shown below has additional advantages as outlined. Consider this and similar MBS Pools when weighing your short term options.
GNMA 15 Year 2.50%
+90bps over 5YR USTN
With prices at historical highs, some portfolio managers have taken the route of (re)investing idle cash and portfolio roll-off into short term bonds with the hope rates will be higher as these funds come due. Thus investment decisions are being made based on term much more than nominal yield (and clearly so considering spreads are so narrow along the curve). With assistance from a global pandemic, yields collapsed in 2020. But with the promise of a vaccine, there is hope and the real possibility that normalcy may return to our daily lives, financial markets and economy. Of course this turnabout may not occur as quickly as the March decline, but markets are hopeful if not precise on the timing. Accordingly, buyers may look to “socially distance” their investments in a short term ladder. Low duration, plain-vanilla agency mortgage pools are well suited for that purpose. A perfect candidate is the fully amortizing 15yr Mortgage Backed Securities (MBS) with a 2.5% coupon, weighted average life of 5 years, steady cash flow behavior priced to yield well over 1% and 90bps of spread over the 5 year Treasury Note.
The specific pool shown below has additional advantages as outlined. Consider this and similar MBS Pools when weighing your short term options.
GNMA 15 Year 2.50%
- New Issue Pool – GNMA (0% risk weight)
- No heavy geographic concentration: FL 8%, CA 6%, NC 6%
- Weighted Average Coupon: 2.86% - limited refinance incentive
- +~100bps of spread in 0 to +300bps scenario
- Base: 1.22% / 4.98yr Average Life (+92bps)
- +300bps: 1.37% / 5.72yr Average Life (+101bps) – limited extension risk
- ~1.1MM Available
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