| Friday, January 17, 2025 |
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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 |
| 01/10/25 | 4.30 | 4.32 | 4.30 | 4.22 | 4.38 | 4.47 | 4.58 | 4.68 | 4.76 | 5.02 | 4.95 |
| 01/13/25 | 4.31 | 4.32 | 4.32 | 4.22 | 4.38 | 4.48 | 4.60 | 4.70 | 4.78 | 5.04 | 4.96 |
| 01/14/25 | 4.31 | 4.31 | 4.32 | 4.21 | 4.37 | 4.47 | 4.60 | 4.71 | 4.79 | 5.06 | 4.98 |
| 01/15/25 | 4.29 | 4.31 | 4.30 | 4.17 | 4.27 | 4.34 | 4.45 | 4.55 | 4.65 | 4.95 | 4.88 |
| 01/16/25 | 4.30 | 4.30 | 4.30 | 4.17 | 4.23 | 4.30 | 4.40 | 4.51 | 4.61 | 4.93 | 4.86 |
The data in the table above is static as of the time it was pulled, so rates may have changed. Treat all data in this table and PMR as indications only and availability is always subject to change. This information was pulled manually from sources we believe to be reliable. New source, as of 12/12/2022, Bloomberg, L.L.P. As of: close of business 1/16/2025.
2025 Municipal and Mortgage Market Update
The MBS market in general remains one of the best (if not the highest) nominal yield and spread investment options for bank portfolios in today’s interest rate environment. As a proxy below, we look at the current coupon 30yr MBS index vs a blend of treasury to look at historical spreads. We are above average and remain wide to historical standards (unlike a lot of other sectors such as corporates that are trading at or near all-time tights).
Our customers are managing bond portfolios in very interesting environment. Throughout most portfolio managers careers for the last 30yrs MBS historically on average has traded a premium dollar prices and overall negative convexity. Since 2022 and the fed hiking cycle, we are in unique times where we can add positively convex structures at deep discounted dollar prices in MBS… rarely can I say that an MBS pool will perform on par to a UST or Muni in a -300bps shock (but we can today).
Sector / Portfolio Ideas
Within the MBS market, we are seeing a lot of relative value options that banks should consider or explore. While at times we can get lulled into buying our current / usual mix of securities we can add a tremendous amount of value if we can be flexible on these allocations and/or sectors.
Best Investment Options by Duration
If we can leave you with one key idea is to continue to follow the decision matrix and extend into the “right” structures. We currently stand between a +1 to +2 standard deviations and the risk reward is becoming lopsided. Below is an example of 4yr-5yr duration options and how they perform from a yield and total return perspective.
Below is great example of how the optically widest and highest yielding security in the base case is a 15yr 5% pool. However, when you pull back the onion it underperforms most other sectors in the shock scenarios. If nothing changes it’s the best investment, but if we move outside of a tight band of -100 to +100bps it underperforms (sometimes significantly).
This is why our own CCB portfolio has been incrementally adding to the DUS sector with discounted dollar price offerings. We believe it offers one of the best performing investments across a range of scenarios.
For the context on the municipal side, I always like to use the chart below to look at municipal yields as a percent of treasuries. An important reminder is these ratios are looking at AAA rated 5% coupon bonds, we typically traffic in both 4 and 5% coupon and across the entire investment grade credit spectrum, where you can pick up roughly another 10% of treasury yield.
Absolute yields are as high as we have seen since October of 2023, combined with the improved municipal/treasury ratios – we are entering 2025 in an environment what continues to favor owning duration where taxable equivalent yields for s-corps can exceed 6% on high quality credits.
Please reach out to your Capital Markets representative to discuss the best investment strategies for your bank.
Our customers are managing bond portfolios in very interesting environment. Throughout most portfolio managers careers for the last 30yrs MBS historically on average has traded a premium dollar prices and overall negative convexity. Since 2022 and the fed hiking cycle, we are in unique times where we can add positively convex structures at deep discounted dollar prices in MBS… rarely can I say that an MBS pool will perform on par to a UST or Muni in a -300bps shock (but we can today).
Sector / Portfolio Ideas
Within the MBS market, we are seeing a lot of relative value options that banks should consider or explore. While at times we can get lulled into buying our current / usual mix of securities we can add a tremendous amount of value if we can be flexible on these allocations and/or sectors.
Best Investment Options by Duration
- <3yr Duration -> Discounted Hybrid ARMs and Higher Cap CMO Floaters (7% or higher caps)
- 3-5yr Duration -> Continue to favor tight window DUS at discounts (<4.50% coupons)
- 5-7yr Duration -> Deep discount MBS pools (ex 20yr 2% or seasoned 30yr 3%)
- 10yr+ Duration -> Deep discount DUS with tight windows
- Pre/Post Reset ARMs (<12 MTR) -> These continue to be well bid and have possible gains
- 15yr 1.5% to 3.0% Coupons -> Historically tight spread on both YTH and BAM/Bloomberg Median
- Low Book Yields (<3%) -> recast into 5% or higher yields if you can absorb losses
- Short Munis (<3yrs) -> very low TEY relative to alternatives (taxable munis trading at historically tight spreads)
- Focus on structure and total return (vs outright nominal spreads or highest yields)
- Lengthen duration if possible
- Buy deep discount convexity profiles
- Swap out of tight sectors into better sectors / structures (i.e. sell 15yr 2.5% and swap into 5yr DUS)
- Decrease convexity / call risk when possible
If we can leave you with one key idea is to continue to follow the decision matrix and extend into the “right” structures. We currently stand between a +1 to +2 standard deviations and the risk reward is becoming lopsided. Below is an example of 4yr-5yr duration options and how they perform from a yield and total return perspective.
Below is great example of how the optically widest and highest yielding security in the base case is a 15yr 5% pool. However, when you pull back the onion it underperforms most other sectors in the shock scenarios. If nothing changes it’s the best investment, but if we move outside of a tight band of -100 to +100bps it underperforms (sometimes significantly).
This is why our own CCB portfolio has been incrementally adding to the DUS sector with discounted dollar price offerings. We believe it offers one of the best performing investments across a range of scenarios.
For the context on the municipal side, I always like to use the chart below to look at municipal yields as a percent of treasuries. An important reminder is these ratios are looking at AAA rated 5% coupon bonds, we typically traffic in both 4 and 5% coupon and across the entire investment grade credit spectrum, where you can pick up roughly another 10% of treasury yield.
Absolute yields are as high as we have seen since October of 2023, combined with the improved municipal/treasury ratios – we are entering 2025 in an environment what continues to favor owning duration where taxable equivalent yields for s-corps can exceed 6% on high quality credits.
Please reach out to your Capital Markets representative to discuss the best investment strategies for your bank.
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