2015 MASBO Annual Conference

Transcription

1 10-Year Interest Rates from MASBO Annual Conference Economic Background, 2015 and Beyond: Where Are We Heading B. Craig Elder Director Senior Fixed Income Analyst Robert W. Baird & Co., Inc. Please Note: Information in this presentation is as of April 15, 2015 or prior. Source: Goldman Sachs 10 year taxable 2 1

2 Interest Rates from 3000 BC Treasury Yield Curve Source: Business Insider 3 4 2

3 U.S. Treasury Supply Fixed Income Sector Statistics April 14, 2015 Source: Barclays Sector Rating Maturity Duration Mod Adj Convexity Average Coupon Yield Spread Price 12-M TR Treasury Aaa/AA % 1.200% N/A $ % Agency Aa1/AA % 1.61% 50 $ % MBS Aaa/AAA % 2.33% 18 $ % Municipal Aa2/AA % 2.01%/3.38% N/A $ % Corporate A3/BBB % 2.87% 127 $ % High Yield B1/B % 5.94% 447 $ % 5 Yields presented represent the prevailing market price as of 4/14/2015 and are not representative of a specific issue. The indices used in this report to measure and report performance of various sectors of the market are unmanaged and direct investment in indices is not available per Barclays. 6 3

4 Comparative Total Returns April 13, 2015 Source: CreditSights Annual Total Return Ranking April 13, 2015 Source: CreditSights 7 8 4

5 Economic Growth Source: Walt Handelsman - Newsday

6 Inflation Key to Economy Innovative New Jobs

7 Beneficiaries of Economic Innovation Measures of Unemployment Source: Bureau of Labor Statistics U-3: Total unemployed, as a percent of the civilian labor force (this is the definition used for the official unemployment rate). U-6: Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers

8 U.S. Unemployment Rate U-3 U.S. Under-Employment Rate (U6)

9 U3-U6 Comparison U.S. Non-farm Payrolls (2000-Present)

10 U.S. Non-farm Payrolls(1939-Present)

11 What s the Fed Doing? v Asset Purchases v Maturing TSY debt principal rolled to TSY auctions v Agency and MBS maturing principal rolled into MBS v Interest Rate Policy v Extension of the % interest rate guidance v No change since December 2008 v Last raised rates in May 2006 v To 5.25% from 5.00% v Fed forecast is for 0.625% EOY 2015 / 1.625% EOY 2016 v EOY % / Longer Run 3.50% v We believe first hike most likely is September FOMC Voting Members Mean Score 2.3 Source: Robert W. Baird 2015 FOMC Voters Fed Official Title Dove Dovish Centrist Hawkish Hawk Janet Yellen Chair X Jerome Powell Governor X Daniel Tarullo Governor X William Dudley NY Fed President X Lael Brainard Governor? Charles Evans Chicago President X Jeff Lacker Richmond President X Dennis Lockhart Atlanta President X John Williams San Francisco President X Stanley Fischer Vice Chair X

12 Security Holdings of The Fed Source: New York Federal Reserve SOMA Fed s Holdings of U.S. T-Notes & Bonds SOURCE: Bloomberg v Portfolio Holdings - $4.21Trillion v Treasury (9.24 WAL) MBS & Agency v Treasuries - $2.45 Trillion v MBS (Fannie/Freddie/Ginnie) - $1.73 Trillion v Fannie/Freddie/Ginnie Debt - $36.9 Billion

13 The Fed: Taxpayers Hedge Fund Foreign Holdings of U.S. T-Notes & Bonds SOURCE: Bloomberg v Profits to Treasury: v $97.0 Billion FY 2014 v $79.1 Billion FY 2013 v Average before Financial Crisis - $25 billion v Unrealized Gain - $174 billion in 2014 v Unrealized Loss - $53 billion in 2013 v Pays Banks 0.25% on Reserves v Earns 2%-3% on Holdings

14 U.S. Econ Forecasts Street April 15, 2014 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q GDP (2.50%-3.50%) 1.40% 3.05% 3.00% 2.95% 2.70% 2.70% 2.90% 2.85% 2.70% CPI -0.10% -0.10% 0.20% 1.05% 2.10% 2.20% 0.20% 2.20% 2.25% Source: Clay Bennett.com Core PCE 2.0% (U-3) 5.00%(?) 1.30% 1.20% 1.30% 1.50% 1.70% 1.70% 1.40% 1.70% 1.90% 5.57% 5.40% 5.30% 5.20% 5.10% 5.05% 5.40% 5.00% 5.00%

15 U.S. Interest Rate Forecasts - Street April 15, 2014 Current Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Fed Funds 0.25% 0.30% 0.50% 0.75% 1.05% 1.30% 1.60% 3-mo Libor 0.28% 0.37% 0.58% 0.84% 1.14% 1.41% 1.76% 2-yr note 0.50% 0.79% 1.06% 1.30% 1.57% 1.80% 2.10% 10-yr note 1.89% 2.16% 2.35% 2.52% 2.72% 2.89% 3.12% 2s/10s spread yr bond 2.55% 2.77% 2.95% 3.11% 3.29% 3.45% 3.62% 10-Yr FC Range 1.70% 2.65% 1.80% 3.30% 1.90% 3.70% 1.85% 4.10% 1.65% 4.40% 2.00% 4.60% 29 Downside to the Interest Rate Forecast v Housing Activity is Stagnant v Credit is Tight v Millennials v Burdened by Student Loans v Changing Life Styles v Weak Global Economic Growth v IMF Lowered Global Growth Forecast v American Rates Already Attractive Globally v German Bund v 10-year yield 0.11% v 2-year yield negative 0.28% 30 15

16 Municipal vs. Treasury Yields Municipal Bond Issuance v YTD 2015 v $119,314.2 billion v New Money $35,862.0 billion (30.1%) v Refunding - $83,452.1 billion (69.9%) v Insured - $6,641.5 billion (5.6%) v YTD 2014 v $73,113.5 billion v New Money $36,286.9 billion (49.6%) v Refunding - $36,826.5 billion (50.4%) v Insured - $3,202.9 billion (4.4%)

17 Fixed Income Sector Allocation Sources: Sector/Yield & Spread Investment Stance Remarks Treasuries Underweight Real Yields Evaporate? Cash/CDs Marketweight Money Market Alternative? Agencies Overweight Alternative to Treasuries/CDs-Overweight Step-Ups MBS Marketweight Alternative to Treasuries/CDs Municipals Overweight For High-Tax Bracket Investors Corporates Marketweight Yields attractive vs. other IG Overweight Step-Ups Preferreds Overweight TRuPs Out Fx-to-Floating PFDs In High Yield Marketweight Energy is a problem Ø Bloomberg Ø Bank America Merrill Lynch Ø Barclays Indices Total Return Chart Ø Bureau of Labor Statistics Ø Business Insider Ø ritholz.com Ø Claybennet.com Ø CreditSights Ø Federal Reserve Bank Ø Federal Reserve Bank of New York SOMA Account Holdings Ø Goldman Sachs Ø S&P/LSTA Ø Walt Handelsman - Newsday

18 Disclaimers The opinions expressed are those of the presenters and not necessarily of Robert W. Baird & Co. Past performance is not a guarantee of future results. Robert W. Baird & Co., Inc. Member SIPC 35 18