| Wednesday, July 20, 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 |
| 07/13/22 | 1.78 | 2.39 | 2.96 | 3.21 | 3.13 | 3.14 | 3.02 | 3.00 | 2.91 | 3.35 | 3.08 |
| 07/14/22 | 1.99 | 2.40 | 2.93 | 3.16 | 3.15 | 3.16 | 3.06 | 3.05 | 2.96 | 3.36 | 3.11 |
| 07/15/22 | 1.98 | 2.37 | 2.94 | 3.12 | 3.13 | 3.14 | 3.05 | 3.03 | 2.93 | 3.34 | 3.10 |
| 07/18/22 | 1.96 | 2.50 | 3.02 | 3.13 | 3.15 | 3.15 | 3.06 | 3.05 | 2.96 | 3.39 | 3.14 |
| 07/19/22 | 1.93 | 2.52 | 3.06 | 3.18 | 3.23 | 3.22 | 3.14 | 3.11 | 3.01 | 3.42 | 3.17 |
Source: U.S. Department of the Treasury, as of 7/19/2022
Coupon Selection and Performance
Managers of fixed-income portfolios who are measured by total return performance understand the importance of coupon selection.
For non-callable bonds, there are significant differences in the duration of bonds with the same maturity, depending on the coupon (or level of cash flow available for re-investment). Of course duration is a big driver of relative performance, as lower coupons and longer durations out-perform in a declining rate environment, and vice versa.
Coupon selection, and the corresponding price, is an even more important consideration when investing in pre-payable mortgage backed securities, given the potential extension and contraction of the weighted average life and duration. This is particularly true if MBS investors have a strong conviction regarding the direction of interest rates.
MBS investors willing to bet on lower rates ahead, may prefer the lowest coupons trading at the deepest discounts. If interest rates do decline, the underlying mortgages will likely pre-pay faster, accreting the discount more quickly for a higher rate of return (although they may be better off in a non-pre-payable bond).
However, as you can see in the Relative Value Analysis below, the 15-year MBS pool with the higher coupon of 4.00% outperforms all other coupons in all rate shock scenarios, including the lowest coupon of 2.50% which would accrete the discounted price more quickly, even if rates dropped 300 basis points.
More specifically, the 4.00% coupon strongly outperforms in the Base Case with a yield of 3.76% yield, a WAL of 5.3 years and a spread of +68 bps. Additionally, the 4.00% coupon also outperforms if rates increase 300 bps, with a WAL extension of only 0.8 years.
Given the superior performance across the range of probable outcomes, buyers of 15-year MBS pools should currently favor the 4.00% coupon over other coupons available.
Relative Value Analysis
Bloomberg Median
Source: Bloomberg / Subject to availability / Performance subject to change - based on assumptions noted in table.
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