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Donald van Deventer  

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  • 1,000 More Scenarios For The U.S. Treasury Curve Show 3-Month Treasury Bill Rate Rising From 0.02% To 2.70% In 10 Years
    Thu, Mar. 19 TBT, TLT Comment!

    Summary

    • In the wake of the FOMC meeting results Wednesday, we rebenchmark our 9 factor Heath, Jarrow and Morton interest rate simulation to exactly price today's full U.S. Treasury curve.
    • We use historical volatility from 1962 to 2014 with 9 factors and rate-dependent interest rate volatility.
    • We present the quarterly probability distribution of 3 month, 1 year and 5 year Treasury yields 10 years and 30 years forward.
  • International Business Machines: A New Bond Market Ranking
    Wed, Mar. 18 IBM 17 Comments

    Summary

    • IBM's 10-year cumulative default probability has fallen from 0.91% on July 21 to 0.63% today.
    • The firm ranks 4th-lowest in long-term default risk of 460 U.S. peers in the "software and services" wing of the Information Technology sector.
    • All of IBM's heavily traded bonds ranked solidly in the 2nd quartile of all heavily traded bonds by our "best value" ranking, much better than most iconic corporate bond issues.
  • One Thousand Scenarios For The U.S. Treasury Curve
    Thu, Mar. 12 TBT, TLT, TMV 2 Comments

    Summary

    • 23,117 daily observations on 1 year government yields in the USA and Japan show that rates bunch near the zero yield level and can go negative.
    • We benchmark a 1,000 scenario simulation in today's yields so that our Monte Carlo simulation correctly prices the entire current Treasury curve.
    • We present 10 and 30 year comparisons of forward rates with expected rates and the "risk neutral" rates used for security valuation.
  • Apple Bonds: How Much For The World's No. 1 Brand?
    Thu, Mar. 5 AAPL 9 Comments

    Summary

    • There were 307 trades on 14 fixed-rate bond issues of Apple Inc. for a principal amount of $145.2 million on March 3.
    • We compare the credit spread to default probability ratios on these bonds with the same ratios on 449 heavily traded bond issues on the same day.
    • Although Apple has the lowest default probabilities of peers, its credit spreads also are very low and its best bond ranks behind 148 other bond issues for "best value."
  • Allergan Leads The 20 Best Value Bond Trades With Maturities Of 1 Year Or More
    Tue, Mar. 3 AGN, AAPL, ACT Comment!

    Summary

    • On March 2 in the U.S. bond market there were 25,172 bond trades in 4,359 non-call fixed rate issues of 1,235 corporations.
    • We rank all bond issues with at least $5 million in trading volume by our "best value" criterion, the ratio of credit spread to matched maturity default probability.
    • Allergan leads the list, followed by Royal Bank of Canada, Becton Dickinson, Fiserv, DuPont and Apple.
  • AT&T Inc. Bonds: Risk Has Risen And Reward Has Fallen
    Tue, Feb. 24 T 33 Comments

    Summary

    • On July 25, 2014, we described AT&T as "over-rated" by one notch. That downgrade finally arrived on February 2.
    • Default probabilities have risen substantially since our last report, both in absolute terms and relative to peers. At the same time, the spread to default probability ratio has dropped.
    • Relative to 168 heavily-traded corporate bonds on February 20, 7 heavily-traded AT&T bonds rank in the bottom 25% when ranked by the credit spread to default probability ratio.
  • 30-Year Fixed-Rate Mortgage All-In Yields Rise 0.07% From Last Week
    Thu, Feb. 19 AGNC, BAC, BBT Comment!

    Summary

    • All-in yields rose 0.06% and 0.07% on 15- and 30-year fixed-rate mortgages in the wake of higher long-term current Treasury yields.
    • The implied forward 15-year fixed-rate mortgage all-in yield rose 0.122% from last week.
    • The risk-neutral values of net servicing on new 15- and 30-year fixed-rate mortgages closed the week narrowly mixed.
  • Implied Forward T-Bill Rates Show A Rise To 2.86% In 2021, Up 0.14% From Last Week
    Thu, Feb. 19 AGG, BND, IEF Comment!

    Summary

    • Another big rise in long-term Treasuries, this time a jump of 0.09% to 0.17% at maturities of 7 years and longer, pushed up the implied forward rates.
    • The forward 10-year U.S. Treasury yield in 2025 jumped 0.24% to 3.00%. The implied forward 1-month bill rate now peaks in April 2021, 4 months earlier.
    • A 25,000-scenario simulation of U.S. Treasury yield curve movements shows a very wide range of possible outcomes, including a big probability of rates near and below zero.
  • Transocean Tops Credit Default Swap Trading Volume
    Thu, Feb. 19 RIG 47 Comments

    Summary

    • Transocean ranked first among corporate reference names in credit default swap trading during the week ended February 13. The firm ranked 2nd on February 17 in corporate bond volume.
    • The firm's heavily traded bonds rank high in individual issue trading volume, on the widest spreads ranking, and in the lowest price rankings.
    • When all heavily traded fixed rate corporate bonds are ranked by the credit spread to default probability ratio, eight Transocean bonds rank in the bottom 13 of 200 bonds.
  • Implied Forward T-Bill Rates Show A Rise To 2.72% In 2021, Up 0.13% From Last Week
    Sat, Feb. 14 TLT 10 Comments

    Summary

    • Implied forward Treasury bill rates rose as much as 0.30% compared to last week after current U.S. Treasury yields moved up 0.15% to 0.20% at 3 years and longer.
    • At 30 years, the yield increase of 0.160% was comprised of a rise of 0.165% in expected future short rates and a fall of 0.005% in the term premium.
    • Implied forward T-bill rates now peak in August 2021, 2 months earlier than last week.
  • 30-Year Fixed Rate Mortgage All-In Yields Jumped 0.09% And Net Servicing Values Fell 0.55% From Last Week
    Thu, Feb. 12 AGNC, BBT, C 4 Comments

    Summary

    • All-in yields on 15- and 30-year fixed rate mortgages rose 0.070% and 0.092% this week.
    • The value of net servicing on a newly originated 30-year fixed rate mortgage fell by a market-implied 0.55% since last week.
    • The implied 15-year fixed rate mortgage all-in yield in 2025 is 4.636%, up 0.10% from last week.
  • Berkshire Hathaway Leads Best Value Long-Term Bond Trades
    Tue, Feb. 10 BRK.A, BRK.B, ABX 9 Comments

    Summary

    • On February 9, there were 18,983 bond trades in 2,980 non-call, fixed-rate corporate bond issues of 975 bond issuers worth $5.2 billion in principal.
    • We rank bonds with at least $5 million in volume and maturities of 20 years or more by our best value criterion, the ratio of credit spread to default probability.
    • Berkshire Hathaway tops the rankings with a ratio of 33 times.
  • McKesson Corporation Leads The 20 Best Value Bond Trades With Maturities Of 1 Year Or More
    Fri, Feb. 6 MCK Comment!

    Summary

    • There were 21,810 bond trades in 3,108 non-call fixed rate corporate bond issues of 968 issuers for $6.6 billion in principal on February 4.
    • 272 bond issues had at least $5 million in trading volume. We rank these issues by our "best value" criterion, the ratio of credit spread to default probability.
    • McKesson Corporation leads the rankings with a spread to default probability ratio of more than 400 times.
  • Primary Fixed Rate Mortgage All-In Yields Fall More Than 0.04% Despite Rise In Points
    Thu, Feb. 5 AGNC, BAC, BBT 1 Comment

    Summary

    • Points on new mortgages rose by 0.1% this week and long-term Treasuries rose 0.09%, but the all-in yield on new 15- and 30-year fixed rate mortgages fell.
    • All-in yields, which include points, dropped 0.046% and 0.062% at 15 and 30 years, respectively.
    • The value of net servicing on a new 30-year fixed rate mortgage edged up 0.08% this week.
  • Implied Forward T-Bill Rates Show A Rise To 2.59% In 2021, Up 0.12% From Last Week
    Thu, Feb. 5 AGG, BND, IEF 5 Comments

    Summary

    • Current Treasury yields rose 0.09% on the long end of the curve this week, boosting the peak in implied forward T-bill rates to 2.59%, up 0.12%.
    • The implied peak is in October, 2021, 4 months later than last week's projections.
    • Over 30 years, expected future short term Treasuries rose by 0.093% and the term premium in the Treasury yield curve narrowed 0.003% to 0.697%.
  • Transocean Default Risk Jumps And Bond Trading Volume Again Tops The Charts
    Fri, Jan. 30 RIG 33 Comments

    Summary

    • Transocean Ltd. was the most heavily traded issuer in the U.S. bond market on January 28, with 996 trades for $254 million in 12 bond issues.
    • Individually, four Transocean bonds ranked in the top 20 bond issues by daily trading volume. Seven of the firm's bonds ranked in the 20 widest credit spreads on January 28.
    • When ranked by the "best value" criterion of credit spread to default probability, the eight most heavily traded Transocean bonds ranked in the worst 16 of 287 heavily traded bonds.
  • Interest Rate Cycle Sharpens As Implied Forward T-Bill Rates Bend Down By 0.30% In 2025
    Fri, Jan. 30 TLT, TBT, TMF Comment!

    Summary

    • Implied forward T-bill rates fell significantly this week at maturities from 3 to 5 years and 8 to 10 years.
    • The result is a sharper implied rise and fall in T-bill rates. The implied peak is 2.47% in 2021 followed by a drop to 2.06% in 2025.
    • A 3-D graph of implied forward yield curves shows the sharp implied yield curve gyrations.
  • Primary Mortgage All-In Costs Reverse Last Week's Fall, Net Servicing Values Close Up 0.57% This Week
    Thu, Jan. 29 AGNC, BAC, BBT 4 Comments

    Summary

    • All-in yields on 15- and 30-year fixed rate mortgage rose 0.036% and 0.022% this week, in light of the 0.02% to 0.13% rise in 2- to 30-year Treasuries.
    • The implied forward yield on 15-year fixed rate mortgages was unchanged this week.
    • The value of net servicing on a newly originated 30-year fixed rate mortgage rose 0.57% on the week.
  • Stressed Out: A Bond Market Risk Ranking Of Leading Financial Institutions
    Tue, Jan. 27 ALLY, BLK, BRK.B Comment!

    Summary

    • Traded credit spreads for leading financial institutions are a much more accurate risk measure than the Fed's CCAR 2015 stress tests for many reasons.
    • We analyze 1,281 trades on 202 heavily traded bonds of 51 different legal entities in the financial services business.
    • Northern Trust, in the eyes of the bond market, is the least risky firm. Wells Fargo ranks 18th, JPMorgan 29th, Citigroup 34th, and Bank of America 42nd.
  • Bunge Limited Leads The 20 Best Value Bond Trades With Maturities Over One Year
    Mon, Jan. 26 BG, BRK.A, BRK.B 4 Comments

    Summary

    • On January 23, there were 19,710 bond trades in 3,131 non-call fixed rate bond issues of 964 corporations representing $5.7 billion in principal.
    • We rank these trades by our usual "best value" criterion, the ratio of credit spread to matched-maturity default probability.
    • Bunge Limited led the list of 20 best value trades with a credit spread to default probability ratio of more than 206 times.
  • Primary Fixed Rate Mortgage All-In Yields Fall 0.02% To 0.04%, And Value Of Net Servicing Closes Down 0.67% This Week
    Sat, Jan. 24 AGNC, BBT, C 1 Comment

    Summary

    • 15- and 30-year fixed rate mortgage yields dropped 0.036% and 0.022% this week, despite a rise in Treasuries of 0.02% to 0.07% and an 0.1% increase in points.
    • Net servicing values for a newly originated 30-year fixed rate mortgage dropped 0.67% during the week.
    • The 10-year forward implied all-in yield on a 15-year fixed rate mortgage was down just 0.008% on the week.
  • Bank Of America: A Final Pre-Stress Test Credit Risk Analysis
    Fri, Jan. 23 BAC 59 Comments

    Summary

    • Bank of America was the 4th most heavily traded bond issuer in the US on January 20. The bank's short-term default probabilities are up almost 0.40% since September 9.
    • The bank's average credit spread is 0.196% over the composite marginal cost of funds of big bank peers as measured by the U.S. Dollar Cost of Funds Index.
    • The ratios of credit spread to default probabilities for Bank of America bonds rank in the bottom 38% of all heavily traded bond issues on January 20.
  • U.S. Treasury Term Premium Unchanged But Higher Expected Rates Increase Forward T-Bill Rates By 0.27%
    Fri, Jan. 23 AGG, BND, IEF 2 Comments

    Summary

    • Current U.S. Treasury yields rose 0.02% to 0.07% at maturities from 2 to 20 years this week. The implied U.S. Treasury yield in 2025 rose 0.04% from last week.
    • The U.S. Treasury term premium held steady at 0.43% for 10 years and 0.70% for 30 years.
    • Forward 1 month Treasury bill rates now peak at 2.52% in August 2021, a peak up 0.11% and 6 months earlier than projected last week.
  • Hess Corporation Bond Issue Leads Best Value 10-Year Bond Trades
    Thu, Jan. 22 HES Comment!

    Summary

    • On January 20, there were 20,472 bond trades in 3,144 issues of 982 issues in the U.S. corporate bond market.
    • We rank the best trades by our usual criterion, the ratio of credit spread to matched maturity default probability.
    • Hess Corporation's bond due 2041 was ranked best value with a spread to default probability ratio of 34 times.
  • Primary Fixed Rate Mortgage All-In Yields Fall 0.07% And Value Of Net Servicing Closes Down 0.26% This Week
    Fri, Jan. 16 BAC, AGNC, BBT 1 Comment

    Summary

    • Fixed rate mortgage all-in yields fell 0.07% this week, lagging the 0.18% to 0.28% drop in current U.S. Treasury yields at maturities from 2 to 30 years.
    • The value of net servicing fell 0.26% for the week on newly originated 30-year fixed rate mortgages.
    • We show the difference between forward U.S. Treasury rates and the best estimates of the market's expected rates beginning with this week's note.
  • Forward 1 Month T-Bill Rates Drop Up To 0.43% While U.S. Treasury Term Premium Stay Steady At 0.69% At 30 Years
    Fri, Jan. 16 BND, BOND, IEF 3 Comments

    Summary

    • Forward rates took a sharp drop this week as current U.S. Treasury yields dropped 0.18% to 0.28% at maturities from 2 years to 30 years.
    • We use a 9 factor HJM model of the U.S. Treasury curve to separate forward rates from the market's estimates of the actual short term rates looking forward.
    • We show that the market expects to earn a term premium or risk premium of 0.69% over 30 years in excess of expected short term Treasuries.
  • Measuring The Term Premium In The U.S. Treasury Curve
    Mon, Jan. 12 IEF, SHY, TBT 3 Comments

    Summary

    • Measuring the term premium in the U.S. Treasury curve is critical from the perspective of central bankers, market participants and academics.
    • We do that in this article for the U.S. Treasury curve of January 9, 2015.
    • We use the approach of Heath, Jarrow and Morton using a 9 factor constant coefficients model estimated on quarterly U.S. Treasury data from 1962 through September 30, 2014.
  • Russian Federation 1-Year Sovereign Default Probability 9.05%, Up 5.52% In 6 Months
    Mon, Jan. 12 ERUS, RBL, RSX 4 Comments

    Summary

    • Modern reduced form default probabilities for sovereigns have been available since 2008.
    • Recent events in the Russian Federation have driven the one-year default probability for the Russian Federation up 5.52% to 9.05% in the last six months.
    • As with corporate default probabilities, modern statistical default probabilities are more accurate and more granular than legacy credit ratings. They are not subject to pressure from sovereign governments.
  • Fixed Rate Mortgage All-In Yields Fall 0.05% To 0.07%, And Value Of Net Servicing Closes Up 0.60%
    Thu, Jan. 8 AGNC, BBT, C 2 Comments

    Summary

    • All-in costs on 15- and 30-year fixed rate mortgages have fallen 0.054% and 0.070% since our prior analysis on December 18.
    • 15-year fixed rate mortgage yields implied by the mortgage year curve are projected to rise from 3.122% to 4.687% in 2025, down 0.09% from December 18.
    • Net servicing values on a 30-year fixed rate mortgage have risen 0.60% from December 18.
  • Implied Forward T-Bill Rates Plunge 0.36% In 2019, Forward 10-Year Treasury Yields Drop 0.25%
    Thu, Jan. 8 TLT, BND, NUV 2 Comments

    Summary

    • The implied peak in forward 1-month Treasury bill rates has dropped 0.21% and shifted 7 months to September 2021 since our December 18 analysis.
    • The biggest drop in implied forward 1-month Treasury bill rates was more than 0.36% in mid 2019.
    • The implied forward 10-year U.S. Treasury yield fell 0.25% from our December 18 analysis.
  • Travelers Companies' Bond Issue Leads Best Value 10-Year Bond Trades
    Wed, Jan. 7 TRV, AMGN, AZN Comment!

    Summary

    • On January 6, there were 18,448 trades in 3,128 bond issues by 963 issuers, with a principal value of $5.5 billion.
    • We rank the bond issues with maturities of 10 years or more by our usual "best value" criterion, the ratio of credit spread to matched-maturity default probability.
    • The Travelers Companies, Inc.-related bond issue wins the best value ranking, with a spread to default probability of almost 38 times.
  • Donald van Deventer Positions For 2015: It's No Time To Go Double Or Nothing
    Editors' Pick • Wed, Jan. 7 2 Comments

    Summary

    • From university and public pension funds to individual investors, we find investors consistently overlooking their cash needs in deciding their asset strategies.
    • My major real estate focus would be to control one’s housing costs in all dimensions so that you are protected if inflation and rates rise.
    • The theme is “be very careful” and understand how a changing environment can help or hurt you.