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Donald van Deventer

 
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  • Hess Corporation And Apache Corporation Lead 10 Best Value Long Bond Trades
    Yesterday, 10:27 PM APA, COP, PEP Comment!

    Summary

    • On September 12, 2014, there were 15,893 bond trades in 2,916 non-call fixed rate corporate bond issues worth $4.3 billion.
    • We rank all trades of maturities 20 years or longer and daily volume of more than $5 million by the credit spread to default probability ratio.
    • Hess Corporation and Apache Corporation were the best value bond trades with ratios of 28.6 and 28.5 respectively.
  • Comparing The Marginal Cost Of Funds For Berkshire Hathaway, Wells Fargo And Bank Of America
    Sun, Sep. 14 BAC, BRK.A, C 4 Comments

    Summary

    • On September 8, we reported that Wells Fargo had a marginal cost of funding advantage of more than 0.30% over Bank of America.
    • Today, we show that Berkshire Hathaway has a marginal cost of funding below both banks.
    • With tongue partly in cheek, both banks could reduce their marginal funding costs by giving up the implicit TBTF USA guarantee for an explicit Berkshire Hathaway guarantee.
  • Primary Mortgage Yields Rise 0.02% And 30 Year Fixed Rate Mortgage Servicing Values Rise 0.13% This Week
    Fri, Sep. 12 AGNC, BAC, BBT Comment!

    Summary

    • A rise in Treasury yields of 0.06% to 0.09% at maturities from 3 to 30 years contributed to a yield increase of 0.02% in the primary mortgage market this week.
    • The all-in cost of a 15 year fixed rate mortgage will rise from 3.332% today to forward implied levels of 3.802% and 5.454% in 1 and 10 years.
    • The value of net servicing for 30 year fixed rate mortgages rose 0.13% this week.
  • Forward 1 Month T-Bill Curve Rises Again, With Peak At 3.41% In April, 2021
    Fri, Sep. 12 BND, BOND, REM Comment!

    Summary

    • Current U.S. Treasury yields moved up this week by 0.06% to 0.09% for maturities from 3 to 30 years, triggering a 0.10% rise in T-bill forwards from 2022 to 2024.
    • The peak in forward T-bill rates is now 3.41% in April 2021.
    • The forward 10 year U.S. Treasury yield in 2024 is 3.69%, up 0.05% from last week.
  • Bank Of America: A Pre-Stress Test Credit Report Shows Dramatic Progress
    Thu, Sep. 11 BAC 20 Comments

    Summary

    • Bank of America's 10 year cumulative default probability has fallen by 1.70% since June 10, which is a dramatic improvement.
    • There is more to do. Bank of America's marginal cost of funding is 0.088% above the U.S. Dollar Cost of Funds Index, a composite funding cost measure of its peers.
    • BAC default probabilities also remain in the riskiest half of peers, but the credit spread to default probability "value ratio" has improved since June 10.
  • Bank Of America And Its High Marginal Cost Of Funds
    Wed, Sep. 10 BAC 25 Comments

    Summary

    • Banking is a brutal business where cost efficiency, both operational and funding, determines the winners and the losers.
    • We compare the marginal cost of funding for Bank of America Corporation using the U.S. Dollar Cost of Funds Index and traded bonds on September 8, 2014.
    • We find that Bank of America has a funding disadvantage of about 0.30% versus Wells Fargo and that the implicit guarantee of the TBTF banks cannot erase this difference.
  • Royal Dutch Shell Bond Issue Leads The 20 Best Value Bond Trades With Maturities Of 1 Year Or More
    Mon, Sep. 8 RDS.A 5 Comments

    Summary

    • On September 5 in the U.S. corporate bond market, there were 14,691 trades in 2,790 non-call fixed-rate bond issues with $4.2 billion in trade volume.
    • We rank these issues by "best value," defined as the ratio of credit spread to default probability.
    • Royal Dutch Shell affiliate Shell International Finance B.V. ranks first by this value criterion.
  • Forward 1 Month T-Bill Curve Twists, Jumps 0.15% To Peak At 3.33% In February 2021
    Fri, Sep. 5 BND, BOND, NUV Comment!

    Summary

    • Current U.S. Treasury yields jumped 0.06% to 0.10% at maturities from 5 to 30 years this week.
    • The result was a twist in forward 1-month T-bill rates that reversed last week's decline.
    • Forward 1 month T-bill rates implied by current yields are now projected to peak at 3.33% in February 2021, 2 months earlier and 0.15% higher than last week.
  • Primary Mortgage Yield Curve Twists With Current 15-Year Fixed Yields Down 0.024% And Forward Yields Up 0.040%
    Fri, Sep. 5 AGNC, BAC, BBT 2 Comments

    Summary

    • Current 15-year fixed rate mortgage yields dropped 0.024% last week despite the sharp rise in U.S. Treasury yields. Mortgage yields generally lag Treasuries.
    • Implied forward 15-year fixed rate mortgage yields rise from the current all-in cost of 3.312% to 3.766% in a year and 5.425% in 10 years.
    • The risk-neutral value of net servicing on a 30-year fixed rate mortgage fell 0.24% from last week.
  • WellPoint Leads The 20 Best Value Bond Trades With Maturities Of 1 Year Or More
    Tue, Sep. 2 WLP 3 Comments

    Summary

    • On August 29 in the U.S. bond market, there were 10,787 trades in 2,475 non-call fixed-rate corporate bonds with $2.1 billion in dollar volume.
    • We rank these bonds by "best value," defined as the ratio of credit spread to default probability.
    • WellPoint Inc. and Bank of Montreal were 1st and 2nd in the rankings, followed by CIBC.
  • Kamakura Corporation Reports Improvement In Corporate Credit Quality In August
    Tue, Sep. 2 END, MCP, RSH Comment!

    Summary

    • The Kamakura troubled company index decreased 0.22% to 4.36% from July 31.
    • The index measures the percentage of public firms that are "troubled," defined as the percent of firms with annualized 1 month default probabilities over 1%.
    • NII Holdings, Endeavour International, RadioShack, Molycorp, and Walter Energy are the U.S. firms ranked high on the default probability rankings.
  • 30-Year Fixed Rate Mortgage Servicing Rights Values Close Up 0.49% For The Week On Rise In Current 15-Year Mortgage Yields
    Fri, Aug. 29 AGNC, BAC, BBT 2 Comments

    Summary

    • Despite the drop of 0.07% to 0.11% in U.S. Treasury yields for maturities from 10 to 30 years, 30-year fixed rate mortgage yields were unchanged this week.
    • The all-in cost of a current 15-year fixed rate mortgage actually rose 0.02%, although forward 15-year fixed rate mortgage yields dropped 0.035% in 2024.
    • As a result, the value of net servicing on a 30-year fixed rate mortgage rose 0.49% for the week.
  • Peak In Forward 1 Month T-Bill Rates Plunges 0.14% To 3.18% In April 2021
    Fri, Aug. 29 BND, BOND, TBT 1 Comment

    Summary

    • Current U.S. Treasury yields dropped 0.07% to 0.11% this week at maturities from 10 to 30 years, forcing another twist in forward U.S. Treasury bill rates.
    • Forward T-bill rates now peak at 3.18% in April 2021, 2 months earlier and 0.14% lower than last week.
    • Forward T-bill rates were down 0.15% from October 2021 through 2024.
  • KeyBank And KeyCorp: Transfer Pricing And Valuation Without Swap Data
    Tue, Aug. 26 KEY Comment!

    Summary

    • U.S. commercial banks have used "funds transfer pricing' since the 1970s to measure GAAP business unit profits and to centralize interest rate risk.
    • The interest rate swap curve has become the standard curve for this, but the curve is manipulated and a poor proxy for the true bank cost of funds.
    • This post uses bond trades on KeyBank and KeyCorp to illustrate how to use the U.S. Dollar Cost of Funds Index for more accurate bank profitability and risk assessment.
  • WellPoint Leads 20 Best Value Bond Trades With Maturities Of 1 To 5 Years
    Tue, Aug. 26 WLP 6 Comments

    Summary

    • On August 22, 2014, there were 14,251 bond trades in 2,751 non-call fixed rate bond issues with $2.7 billion of traded principal.
    • We rank all trades with daily volume of $5 million or more and maturities of 1 to 5 years by the credit spread to default probability ratio.
    • WellPoint, Goldman Sachs, and Marathon Petroleum lead the best value rankings.
  • 30-Year Fixed Rate Mortgage Servicing Rights Values Close Up 0.13% This Week
    Thu, Aug. 21 AGNC, BAC, BBT Comment!

    Summary

    • Primary fixed rate mortgage rates dropped 0.01% to 0.028% this week, in part due to a decline in points on 30-year fixed rate mortgages.
    • This triggered a 0.13% rise in the value of net servicing on a 30-year fixed rate mortgage.
    • The implied 2024 forward yield on a 15-year fixed rate mortgage dropped 0.07% from last week to 5.418%.
  • Forward 1-Month T-Bill Rates Twist Again With A 2021 Peak Implied At 3.32%, Down 0.06% From Last Week
    Thu, Aug. 21 TLT 4 Comments

    Summary

    • U.S. Treasury yields jumped 0.04% to 0.08% in the 2- to 7-year maturities this week.
    • This caused a twist in the implied 1-month forward T-bill rates, with the May 2016 rate down 0.19% and the January 2023 rate up 0.07%.
    • The peak in implied 1-month forward T-bill rates is now 3.32% in June 2021, a peak from 3 months earlier and 0.06% lower than last week.
  • Bond Market Battle: Berkshire Hathaway Vs. Kinder Morgan Energy Partners
    Tue, Aug. 19 BRK.B, KMP 16 Comments

    Summary

    • On August 15, 2014 there were 13,170 bond trades in 2,699 non-call fixed rate corporate issues representing $2.9 billion in notional principal.
    • We rank all trades with at least $5 million in daily volume by the ratio of credit spread to matched maturity default probability, our "best value" measure.
    • Berkshire Hathaway Inc. and Kinder Morgan Energy Partners battle it out for the top ranking.
  • More Evidence On The Funding 'Subsidy' Of The Too Big To Fail Banks
    Tue, Aug. 19 ALLY, AXP, BAC Comment!

    Summary

    • There was $385.8 million in trading of the fixed rate non-call senior debt of BAC, C, JPM and WFC on August 14, 2014.
    • We construct the U.S. Dollar Cost of Funds Index from this data and compare the composite credit spreads of the Too Big to Fail 4 with 6 regional banks.
    • One of the 6 banks had spreads well over the index, but this bank itself was rescued. 3 of the other 5 had spreads below the index.
  • Mortgage Servicing Rights Values Close Mixed For The Week As Current And Forward Mortgage Rates Drop 0.03%
    Fri, Aug. 15 AGNC, BBT, C 2 Comments

    Summary

    • The all-in costs of current 15 and 30 year fixed rate mortgages dropped 0.03% from last week.
    • The all-in cost on a 15 year fixed rate mortgage is projected to rise from 3.327% this week to 3.771% and 5.488% in 2015 and 2024.
    • The risk-neutral value of net servicing on a 30 year fixed rate mortgage fell 0.34% this week, but the net servicing value for a 15 year mortgage rose 0.09%.
  • Forward 1 Month T-Bill Rates Twist With A 2021 Peak Implied At 3.38%, Down 0.07% From Last Week
    Fri, Aug. 15 BND, BOND, TBT 2 Comments

    Summary

    • Current Treasury yields dropped 0.03% at maturities of 7 years and longer this week, which generated a twist in the implied forward T-bill rates.
    • The implied 1 month T-bill rate in December 2014 rose 0.03% and the July, 2015 forward was the largest decliner at 0.10%.
    • The peak in implied forward rates is now 3.38% in September 2021, 0.07% lower and 3 months later than last week.
  • 5 Of 7 Regional Banks Trade At Credit Spreads Better Than Too-Big-To-Fail Banks
    Editors' Pick • Wed, Aug. 13 ALLY, AXP, C 2 Comments

    Summary

    • The debate about the effective funding subsidy for the too-big-to-fail banks and their implicit government guarantee is an important one.
    • We present bond market pricing that shows 5 of 7 regional banks traded at better credit spreads than the U.S. Cost of Funds Index, the proxy for TBTF funding costs.
    • High secondary trading volume in the TBTF bank bonds is not necessarily a plus. Exxon Mobil, with $220,000 of trade volume on August 11, is in stronger financial condition.
  • Kinder Morgan Energy Partners Leads The 20 Best Value Bond Trades, August 11, 2014
    Tue, Aug. 12 KMP 14 Comments

    Summary

    • There were 15,965 bond trades in 2,959 senior non-call fixed rate corporate bond issues with trading volume of $3.8 billion on August 11, 2014.
    • We show that investors have not demanded more spread as default risk goes up, which is why ranking "best value" by the spread to default ratio is important.
    • We rank the best trades among those with daily volume of $5 million or more, with Kinder Morgan Energy Partners ranking number 1.
  • Measuring The Funding Costs Of The Too Big To Fail Banks: The U.S. Dollar Cost Of Funds Index
    Tue, Aug. 12 C, JPM, WFC 9 Comments

    Summary

    • The marginal cost of funds for the biggest banks in the world is of critical importance to regulators and management of competing financial institutions.
    • The swap curve historically has been used as a funding cost proxy but negative swap spreads and the Libor scandal have made the swap curve unsuitable for this purpose.
    • This note describes a transparent market-based benchmark for measuring marginal fund costs and for pricing interest rate derivative calculations that is free from conflict of interest.
  • Forward 1-Month T-Bill Rates Plunge 0.26%, But Forward 10-Year U.S. Treasury Yields Down Only 0.04% From Last Week
    Sat, Aug. 9 TLT Comment!

    Summary

    • Current 5- and 7-year U.S. Treasury yields dropped about 0.16% from last week.
    • In response, forward 1-month T-bill rates dropped 0.26% in June 2016. The peak now comes at 3.45% in June 2021, about the same peak as 2 weeks ago.
    • The drop in forward 10-year U.S. Treasury yields in 2024 was only 0.04%, although current 10-year yields dropped 0.15% on the week.
  • Mortgage Spot And Forward Yields Jump 0.02% To 0.06% This Week Despite Fall In Treasuries
    Fri, Aug. 8 AGNC, BAC, BBT 5 Comments

    Summary

    • The all-in effective yields on 15- and 30-year mortgages rose 0.026% and 0.028%, respectively this week, despite the fall in Treasury yields.
    • Forward 15-year fixed-rate mortgages in 2024 actually rose 0.06%, even with 10-year U.S. Treasury yields down 0.15% from last week.
    • Net servicing for 30-year fixed-rate mortgages jumped 0.58% in risk-neutral value on this week, with 15-year net servicing down slightly.
  • Credit Spreads And Default Probabilities: A Simple Model Validation Example
    Thu, Aug. 7 2 Comments

    Summary

    • Traders in bonds and credit default swaps are bombarded with information on the default probabilities implied by credit spreads using a simple ratio.
    • This ratio predicts that the credit spread will be less than the default probability, but that was true on only 2% of the heavily traded bonds on August 5, 2014.
    • The ratio asserts only 2 variables predict credit spreads, but 67 financial variables are important in predicting 2.4 million observations on CDS spreads. The simple ratio is just wrong.
  • Vodafone Group PLC: Default Risk Is Down Sharply, But Value Ranks In The Bottom 10% Of Bonds
    Tue, Aug. 5 VOD Comment!

    Summary

    • The 10-year cumulative default risk of Vodafone has dropped a massive 5.72% since April, but it remains high.
    • Compared to telecommunications peers, Vodafone ranks in the riskiest 30% at all time horizons.
    • Of the 189 heavily traded bonds on August 4, 177 of the bonds offered a better ratio of spread to default probability than the best Vodafone bond.
  • HCA Leads The 20 Best Value Bond Trades With Maturities Of 10 Years And Over
    Tue, Aug. 5 HCA Comment!

    Summary

    • There were 13,015 trades in 2,713 senior non-call fixed rate debt issues on August 1 with a dollar volume of $3.5 billion.
    • Ignoring ratings, we rank the bonds by the "credit spread to default probability" best value criterion.
    • HCA Inc., Suncor Energy, Hess, and Berkshire Hathaway lead the best value list.
  • Kamakura Reports Slight Decline In Corporate Credit Quality In July
    Mon, Aug. 4 BKESY, EGFEF, END Comment!

    Summary

    • The Kamakura troubled company index rose 0.13% to 4.58% in July. The index measures the percent of public firms with 1 month default probabilities over 1.00%.
    • Banco Espirito Santo S.A. was the riskiest public firm in the world among the universe of firms with legacy credit ratings.
    • NII Holdings, RadioShack, and Endeavour International were the 3 riskiest U.S. firms.
  • Mortgage Servicing Rights Values Close The Week Mixed After A 0.01% To 0.02% Rise In Current And Forward All-In Mortgage Yields
    Fri, Aug. 1 AGNC, BBT, C 13 Comments

    Summary

    • The all-in costs on 15-year and 30-year fixed rate mortgages fell 0.016% and 0.01%, respectively.
    • The all-in cost of a 15-year fixed rate mortgage is 3.331% now, and the implied forward all-in costs are 3.801% and 5.454% in 1 and 10 years.
    • Mortgage servicing rights values closed mixed. The risk neutral value of 5 basis points of net servicing on a 30-year fixed rate mortgage was up 0.15% for the week.
  • Forward 1-Month T-Bill Rates Surge 0.15% In 2021 After 0.06% Rise In Current 7- And 10-Year Treasury Yields
    Fri, Aug. 1 TLT Comment!

    Summary

    • This week's 0.06% rise in 7- and 10-year U.S. Treasury yields triggered a 0.15% rise in implied forward T-bill rates.
    • Forward 1-month T-bill rates now reach a peak of 3.62% in March 2021, one more earlier and 0.15% higher than last week.
    • The 2024 implied forward U.S. Treasury 10-year yield dropped 0.01% to 3.76%.