Hoosier Banker 25 decisions cannot be based on an isolated path for interest rates. Identifying the best relative value within each fixed-income sector is crucial, and laddering out various maturities across the yield curve can help hedge against multiple-rate-path scenarios. As of now, taxable munis offer the best relative value in the short end of the yield curve. HB who buy shorter-dated tax-exempt munis, a revision in strategy is warranted. Of course, this doesn’t mean the only alternative is to buy bullet Agencies or Treasuries. Instead, buyers needing to fill shorter maturities should look to the taxable muni market. In Figure 2, the red line represents yields on AA-rated taxable munis across the curve. Notice that this sector maintains positive spreads to both Agencies and Treasuries from the two-year point and beyond. These taxable muni yields also have positive spreads on a TEY basis to bank qualified tax-exempt munis in the two-to-10-year part of the curve. Taxable muni spreads have been trading between 25 to 50 basis points over Treasuries for most of the year. Much has been made of the late cycle behavior financial markets have been exhibiting this year. Whether or not the Fed will continue on its course to increase short-term rates remains to be seen. The spread between two-year and 10-year Treasury yields is currently just under 30 basis points, the tightest since 2007. Absent a material increase in longer-dated Treasury yields, that doesn’t leave much room for the Fed before the curve inverts. Now more than ever, institutional investors need to maintain a proactive strategy that identifies the best relative value on sector allocations and duration targets. It’s impossible to know when the next economic cycle will begin, and rates start to fall. Therefore, investment Figure 2 There’s lending, and then there’s intelligent lending. Market Insight & Lead Generation Pricing & Total Relationship Optimization Portfolio & Lender Performance Analysis Credit Surveillance & Portfolio Tracking Credit Analysis & Assessment Act on intelligent insights with the tools to succeed at every stage of your lending lifecycle. Learn more at spglobal.com/commercial-lending
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