Friday, July 24, 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 |
| 07/17/20 | 0.11 | 0.11 | 0.13 | 0.14 | 0.14 | 0.18 | 0.29 | 0.47 | 0.64 | 1.11 | 1.33 |
| 07/20/20 | 0.11 | 0.13 | 0.14 | 0.14 | 0.16 | 0.18 | 0.29 | 0.47 | 0.62 | 1.10 | 1.32 |
| 07/21/20 | 0.09 | 0.13 | 0.13 | 0.15 | 0.14 | 0.17 | 0.27 | 0.45 | 0.61 | 1.09 | 1.31 |
| 07/22/20 | 0.9 | 0.13 | 0.14 | 0.14 | 0.14 | 0.17 | 0.27 | 0.45 | 0.60 | 1.08 | 1.29 |
| 07/23/20 | 0.09 | 0.12 | 0.13 | 0.14 | 0.16 | 0.16 | 0.27 | 0.44 | 0.59 | 1.03 | 1.24 |
Source: U.S. Department of the Treasury, as of 07/23/2020
A Traders Perspective
Source: Bloomberg LP
A Traders Perspective
“You will make better decisions once you begin thinking long-term rather than short-term.” – Adam Smith.
This year has been a whirlwind as COVID-19 has impacted the entire global economy and fixed income markets. The 10yr UST yield started 2020 at 1.92% but is now hovering at 0.58%, while the S&P 500 has whipsawed by 34%, and the Fed lowered overnight interest rates to essentially zero. As humans, we face a recency bias where we give greater importance/weighting to the most recent events. When times are good we tend to have rose colored glasses on the outlook on the future, while in times of glooms we tend to be more focused or biased toward a negative outlook.
This is why we find the regression tool as being extremely helpful as it allows you to step back and help drive the emotions out of your decision making process. Right now we are currently past -2 standard deviations (i.e. yields are low / prices are high) on the 10yr UST.
This year has been a whirlwind as COVID-19 has impacted the entire global economy and fixed income markets. The 10yr UST yield started 2020 at 1.92% but is now hovering at 0.58%, while the S&P 500 has whipsawed by 34%, and the Fed lowered overnight interest rates to essentially zero. As humans, we face a recency bias where we give greater importance/weighting to the most recent events. When times are good we tend to have rose colored glasses on the outlook on the future, while in times of glooms we tend to be more focused or biased toward a negative outlook.
This is why we find the regression tool as being extremely helpful as it allows you to step back and help drive the emotions out of your decision making process. Right now we are currently past -2 standard deviations (i.e. yields are low / prices are high) on the 10yr UST.
Source: Bloomberg LP
Stepping back and thinking longer term over the next 10yrs do you think yields will be higher or lower than they are now? We think most investors would have a risk/reward skew toward higher rates over the 10yrs. Will we have a vaccine in the next 3 months or 9 months? Nobody knows for sure, but we would be willing to bet we will make it thru this current crisis and our economy will recover.
Given this outlook and where we currently stand on a 10yr regression our CCB decision matrix would indicate banks should be looking at several opportunities to adjust their balance sheet (both assets / liabilities).
Key Opportunities
Now is the time to setup your bank to thrive over the next 5-10 years. While it is hard to get long more funding or not reach for yield, we would urge you to try to avoid short-term thinking and look to setup your bank to succeed over the long-term.
Given this outlook and where we currently stand on a 10yr regression our CCB decision matrix would indicate banks should be looking at several opportunities to adjust their balance sheet (both assets / liabilities).
Key Opportunities
- Extend funding – issue 5yr-10yr brokered CDs at or near all-time lows
- Shorten duration – buy 10yr/15yr high cashflow fixed pools, hybrid arms, and floating rate product
- Sell your problem bonds – you will likely never get a higher price than now
Now is the time to setup your bank to thrive over the next 5-10 years. While it is hard to get long more funding or not reach for yield, we would urge you to try to avoid short-term thinking and look to setup your bank to succeed over the long-term.
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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