Investment Strategies For 1 st Quarter 2016

Transcription

1 Investment Strategies For 1 st Quarter 2016 Conference Call will begin at 11:00am CT, lines open at 10:50am CT Audio: Access Code: # You can also listen to the conference call audio using your computer speakers. To maximize the webinar viewing area, please select View Full Screen from the menu or press Alt Enter on your keyboard. Presented by: Ryan W. Hayhurst, Managing Director ryan@gobaker.com Jeff Caughron, COO & Managing Director jcaughron@gobaker.com

2 Poll Question Please select your answer on the right side of your screen and don t forget to hit Submit! 2

3 Economic Conditions & Fed Policy: 1 st Quarter 2016 The US Economy: Unshakably Average Growth o First Quarter = 0.6% o Second Quarter = 3.9% o Third Quarter = 2.0% o Year over Year = 2.2% Job Creation A Bright Spot Lately o o o o 6mo Avg. Payrolls Growth 229K 5.0% Unemployment Rate Participation Rate another new normal Wage Growth trying to rise Business Investment & Household Consumption o o Weak capital spending Consumers peddling slowly Global Economy Weak and Weaker o o o China: The L shaped path Deflation threat increasing Europe & Japan Better, but not much Fed Policy: Tightening Underway (Finally) Source: Bureau of Economic Analysis How fast, and for how long? The plunge has been taken One and done in December or Low and slow but steady? Dropping the Dots Low Line Drive for Rate Path 3

4 Poll Question Please select your answer on the right side of your screen and don t forget to hit Submit! 4

5 A Continuing Disconnect: Fed policymakers suggest higher/faster Market pricing suggests lower/longer 5

6 Nominal US Imports and Exports: 1995 Today Various measures of trade are showing a sharp slowdown: The Baltic Dry Index is sitting at the lowest level since reporting began 2009 Great Recession 2001 Recession 6

7 By the time the Fed finally raised the funds rate in Dec 2015, the two year yield had risen five-fold from its low point in It s now at the same levels of six years ago. US 2yr T-Note Yield: Today After the Fed tightening, the 10yr yield remains more than 80bps lower than it was two years prior and 180 bps below its 2010 level. US 10yr T-Note Yield: Today

8 Yield Curves: Dec 2013 vs Today Yield Curve: Dec 13 Current Yield Curve Pivot Point = ~4.5yrs

9 Yield Curves: 2000, 2007, 2016 Yield Curve: Jun 00 Yield Curve: Jan 07 This interest rate cycle is unprecedented: the tightening cycle may result in a flat/inverted curve at historically low levels Projected Fed Funds Current Yield Curve

10 Poll Question Please select your answer on the right side of your screen and don t forget to hit Submit! 10

11 Average Total Assets & Total Equity / Assets: All IRRM Clients 553 Institutions, Q32015 IRRM clients range in size from $18mm to $2.7 billion in assets o o Average total assets = $216mm Median total assets = $140mm Average 215, Median 139, Max 2,711, Min 18, StDev 263, Total Equity / Total Assets for all IRRM clients is nearly 11.6% o Roughly two thirds of institutions fall between 8.5% and 14.6% Average 11.56% Median 10.97% Max 36.78% Min 3.98% StDev 3.06%

12 Net Interest Change: All IRRM Clients 553 Institutions, Q32015 Average Net Interest Change for all IRRM Clients: o Unchanged Rates = 0.09% o +300bps = 2.37% o Non Parallel (+400/+100bps) = 2.31% Note: For non parallel simulations, cash flow prepays are driven by long end shift Average 0.09% Median 0.05% Max 10.50% Min 10.44% StDev 1.87% Average 2.37% Median 1.80% Max 21.90% Min 10.07% StDev 4.52% Average 2.31% Median 1.54% Max 37.93% Min 24.66% StDev 6.03%

13 EVE Volatility & Liquid Assets Ratio: All IRRM Clients 553 Institutions, Q32015 Average EVE Volatility for all IRRM Clients: o +300bps = 7.24% 1 StDev Range = 22.5 to 8.05% o Non Parallel = 2.20% 1 StDev Range = to Average 7.24% Median 7.13% Max 48.52% Min 50.70% StDev 15.29% Average Liquid Asset Ratio: o 11.31% 1 StDev Range = 5.16 to 17.46% Average 11.31% Median 9.94% Max 38.50% Min 0.29% StDev 6.15% Average 2.20% Median 0.91% Max 47.75% Min 40.37% StDev 14.67%

14 Trend Analysis NIC: All IRRM Clients In the last seven quarters, Net Interest Change (NIC) projections for an unchanged rate environment have fallen and are slightly negative the average bank hasn t quite escaped margin compression. The average IRRM client continues to see NIC projections exceeding 2% for a +300bps environment. Banks are generally well positioned from an earnings at risk standpoint for rising interest rates.

15 Trend Analysis EVE Volatility: All IRRM Clients EVE volatility for IRRM clients has dropped notably over the past seven quarters. This is partly due to strategic changes in duration differentials between assets and liabilities, and partly due to more thorough historical analysis of NMD which produces longer average lives. o Note: Never forget the importance of routinely stress testing baseline NMD assumptions

16 Liquidity Risk Management Sound Practices of Liquidity Risk Management (per FFIEC) Critical elements of sound liquidity risk management include: o o o o o Effective corporate governance consisting of oversight by the board of directors and active involvement by management in an institution s control of liquidity risk. Appropriate strategies, policies, procedures, and limits used to manage and mitigate liquidity risk. Comprehensive liquidity risk measurement and monitoring systems (including assessments of the current and prospective cash flows or sources and uses of funds) that are commensurate with the complexity and business activities of the institution. Active management of intraday liquidity and collateral. An appropriately diverse mix of existing and potential future funding sources. o Adequate levels of highly liquid marketable securities free of legal, regulatory, or operational impediments, that can be used to meet liquidity needs in stressful situations. o Comprehensive contingency funding plans (CFPs) that sufficiently address potential adverse liquidity events and emergency cash flow requirements. 16

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18 Dec 2015 Portfolio Summary All Bank Portfolios on Baker Bond Accounting (BBA) Avg. Book Yield = 2.71% Avg. Life = 4.1 yrs +300bps Avg. Life = 6.0 yrs +300bps Price Risk = 10.4% 18

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23 Sector Spread Comparison 2009 Today: 10yr Municipals (yellow), 5yr Agencies (white), 15yr MBS (orange) 23

24 10 Year Muni to 10 Year Treasury Ratio January 2014 Today 24

25 Poll Question Please select your answer on the right side of your screen and don t forget to hit Submit! 25

26 Falling Supply + Rising Demand = Municipal Outperformance 26

27 10yr Tax Equivalent Municipal Spreads January 2009 Today Tax equivalent municipal bond spreads tend to tighten Q4 as seasonal changes in supply and demand drives prices higher and yields lower. Since 2008, spreads have tightened during the 4 th quarter in 6 out of 7 years. 27

28 10yr Tax Equivalent Municipal Spreads January 2009 Today While not as consistent as the Q4 spread tightening, there does tend to be a seasonal widening of municipal spreads in Q1 as those 4Q supply/demand forces reverse. The exception over the last 7 years were the 1 st quarters of 2011 and 2014 when spreads started the year at abnormally wide levels ( bp). 28

29 Municipal Yield Curve Comparison Treasuries (purple), AAA PSF Municipals (red), AA Municipals (green) 29

30 Good News: The Fed Does Not Own The Same MBS as You Federal Reserve owns approx. $1.75 Trillion Agency MBS Market expects Fed to continue reinvesting pay downs through YE 2016 Market does not expect Fed to sell any MBS for the foreseeable future 30

31 Prepayment Volatility Dropped in , Especially 15yrs 31

32 Non Bank Servicers Are Taking Share And Paying Fast! 32

33 Poll Question Please select your answer on the right side of your screen and don t forget to hit Submit! 33

34 Floating Rate Menu YTM +300 Px. Vol Agy FFunds Floater 40 50bp 0% Agy Prime Floater 55 65bp 0% SBA Floater (101ish px) 70 85bp 0% SBA Floater (105+ px) bp 0% SBA Floater (110+ px) Neg 150bp 0% GNMA Rev Mtg (Par/11 CAP) bp 0% FN/FH Annual ARM (106+ px ) bp 3% GN Annual ARM (1% Collar) bp 4% CMO Floater (7Cap) 60 70bp 2 5% CMO Floater (5.5% Cap) 80 90bp 12 17% 34

35 1Yr CMT & 1Yr LIBOR Have Both Jumped in Recent Months 1Yr LIBOR 1Yr CMT 35

36 FN/FH Annual ARMs based on 1Yr LIBOR offer better yields than several months ago and provide a decent option if an institution needs true rate sensitivity. Premium are higher than on lower coupon Hybrids and prepayment volatility creates the potential for yield volatility, but depreciation potential is limited. 36

37 GNMA 3x1 Hybrid ARMs offer an attractive yield today with future rate sensitivity. Premiums have come down with 1.5% coupons close to par and 2% s less than 102. This reduces the potential negative impact on yield from prepayment volatility and makes Hybrids a good short duration alternative. 37

38 Alternative Fixed Rate Menu Base Yield +300 Px. Vol 10 Yr MBS (3% Cpn / 115 WAM) 1.65% 10% 15 Yr MBS (3.5% Cpn / 155 WAM) 1.90% 11% 20 Yr MBS (4% Cpn / 200 WAM) 2.05% 13% 30 Yr MBS (4.5% Cpn / 300 WAM) 2.40% 15% 5Yr Agency CMBS 1.85% 14% 7Yr Agency CMBS 2.25% 17% 5Yr GNMA Rev Mtg 1.90% 15% 2010 SBAP 2.00% 14% 2014 SBAP 2.30% 17% 38

39 10yr Amortization MBS Stable Cash Flow and Minimal Prepayment Risk o Higher amount of scheduled principal means less reliance on unscheduled prepayments o Less options for homeowner to refinance into a shorter term o Borrowers have less economic incentive to refi since interest is a small % of overall payment Limited Extension Risk o High scheduled principal means even at 0%, 10yr s have a maximum 5.3yr AL o Higher curtailments (extra principal payments) that accelerate in 3 5yrs o 10yr s roll down the curve much better than 15 30yrs Seasoning is relative: 6 18mo WALA 10yr s still good Moderate to higher loan balances OK (not jumbos!) Lower coupons OK (minimal extension risk & price volatility) 39

40 5yr 3yr Spread Have Tightened 30bp Since June 40

41 10yr AMs Have Minimal Prepayment Volatility 41

42 10yr AMs Have Stable Average Lives and Limited Extension Risk 42

43 10yr Prepayments Tend To Be Less Affected By Loan Size 43

44 10yr s Have Greater Amounts of Curtailment Than 15 30yrs 44

45 10yr Amortization MBS offer a good shorter duration, fixed rate option for the short end of a cash flow barbell. The characteristics of the 10yr borrower normally produces an MBS with more stable cash flow, minimal prepayment risk and limited extension risk. Lower coupons, less seasoned pools and higher average loans sizes are acceptable and should still produce a stable cash flow profile. 45

46 Poll Question Please select your answer on the right side of your screen and don t forget to hit Submit! 46

47 Questions?

48 Thank You For Attending Investment Strategies For 1 st Quarter 2016 If you have any additional questions or if you would like to receive more information on any of the topics discussed today, please call your representative or: Ryan ryan@gobaker.com Jeff jcaughron@gobaker.com