Domestic Rates: Government
United States Treasuries, Agencies, and Municipals

Intended for Institutional Investors Only – See Important Disclosures Below

Current Rates:

Source: Bloomberg indexes – Treasury H15T, Agency BVSUG, and SC Municipal BMSTSC as of 8/31/2017

Current Yield Curve:

Source: St. Louis Federal Reserve FRED Database


The yield curve continues to flatten as over the last several weeks investors digest a myriad of mixed economic, political and now weather related signals. Uncertainty related to North Korea, the impact of hurricanes Harvey and Irma has put a bid under risk-off assets, with the 10 year now trading at the lower end of its range, hovering near 2%. In addition, the Trump trade (TRUMP = TAX CUTS and FISCAL SPENDING) has been called into question as efforts at healthcare reform failed, and rhetoric surrounding the debt ceiling is starting to become more of a factor. This, in turn, has led to doubts on the timeline of Tax Cuts and whether they will become a reality at all. On the other hand, strong GDP and employment data are coming in bullish for economic growth, notably with the 2Q17 growth number revised up to 3%. We continue to believe that fixed income markets will be range bound during the Congressional session and any breakouts in yields below or above the range should be treated as suspect. We continue to believe that while tax cuts, hurricane relief, and the removal of the debt ceiling are being discussed, room should be given for higher yields. In addition, we will note that we continue to believe that the Federal Reserve is behind the curve as the Fed Funds rate has remained below most measures of inflation, but recognize that it has started down the path to rate normalization. During the last three tightening cycles, the Federal tightening cycle was slower but longer than the market expected, a natural result of its previous periods of lower for longer. Once the tax cut and budget storms pass, and one can see the beginning of the 12-month lag between Federal Reserve rate increases and their effects, we believe bond prices should offer more mark to market stability.


  1. higher than anticipated inflation
  2. political risk
  3. unexpected currency risk and
  4. Municipal credit risk.

IMPORTANT DISCLOSURES: This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. The views expressed in this report may differ from the views offered in FinTrust Brokerage Services, LLC debt research reports for retail investors. This report may not be independent of FinTrust Brokerage Services, LLC proprietary interests. FinTrust Brokerage Services may trade the securities covered in this report for its own account. Such trading interests may be contrary to the recommendation(s) offered in this report. 

Please see page 7 for analyst certification and additional disclosures.

2 Yr. Sector: Historical Returns and Spreads:

Source: Morningstar Direct as of 8/31/2017

Source: Morningstar Direct as of 8/31/2017


With the 2 Year Treasury currently offering a yield of 1.33% and a spread of 32 bps to the 3-month, we are inclined to look further out the yield curve for some carry as we think the Fed will continue to push short rates higher than current levels. Like their treasury counterparts, agencies do not look any better given the tight spreads. During the last two Federal Reserve rate tightening cycles, rolling 3 year returns on the two-year treasury index rolled below the rolling 3 year returns on the 3 Month T-bill Index. At current rate levels, this would require the market to price in additional Federal Reserve rate hikes.

5 Yr. Historical Returns and Spread Information:

Source: Morningstar Direct as of 8/31/2017

Source: Morningstar Direct as of 8/31/2017


Like the 2 year sectors, 5 year treasuries and agencies are below historical average spreads, but we believe are more compelling on a carry basis. The current 69 basis point spread again the 3-Month t-bill is 40.59% of the starting yield level of 1.70%, verse a historical average of 52.26% against starting yield levels. While five-year sector rolling returns did dip below 3 Month t-bill rolling returns during the last two rate hiking cycles, this would be hard to accomplish currently unless the pace of Federal Reserve rate hikes accelerates materially. As a result, we find some value in the five-year sector, particularly on any further price weakness toward the December high yields.

7 Yr. Historical Returns and Spread Information:

Source: Morningstar Direct as of 8/31/2017

Source: Morningstar Direct as of 8/31/2017


Given the length of the current expansion, we believe the seven-year sector might offer the most compelling value currently for buy and hold accounts, balancing near term and longer-term risk. At current rate levels, the 94 bps of carry is compelling while the 1.95% absolute yield level is higher than current measures of inflation. The seven-year sector would offer some appreciation support if the economy where to unexpectedly slow and rates fall while also being short enough for investors to roll down and out if interest rates begin to accelerate upward at a quickening pace.

10 Yr. Historical Returns and Spread Information:

Source: Morningstar Direct as of 8/31/2017

Source: Morningstar Direct as of 8/31/2017


The 10 year at 2.12% is close to where it should be in our opinion. The 10 year yield now sits close to the area of actual 10 year realized inflation measures plus its traditional spread (80 bps) to inflation measures. Over long periods of time, the Federal Funds rate and inflation rates have tracked each other. This relationship, however, has broken down during the Federal Reserve’s extended Q.E. policies. If one assumes a normalization of rates, the Fed Funds should be in the area of the ten-year Consumer Price Index which registered at 1.57% in July. This implies the Fed is currently behind the long-term market estimates. We are also of the opinion that the lack of inflation is more of a cyclical phenomenon, which the market is treating as structural. In short, we think rates go higher over the long term, and with rates at current levels, buy and hold investors aren’t compensated for this risk this far out on the curve. We think the 10-year sector could be volatile around this center tendency, and will offer the best trading opportunities, as it has room to rally and decline as market perceptions about Federal Reserve activity change.

Important Disclosures:

Research Analyst Certification: The research analyst responsible for the preparation of this research report certifies that; (a) the views expressed in this research report accurately reflect the research analyst’s personal views about any and all of the subject security(ies) and issuer(s), and (b) no part of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report.

Conflict of Interest & Important Disclosures:
This research contains the views, opinions and recommendations of FinTrust Investment Advisors’ or its affiliates research analysts. Research analysts routinely consult with FinTrust Investment Advisors trading desk personnel in formulating views, opinions and recommendations in preparing research. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and report(s). Therefore, this research may not be independent from the proprietary interests of FinTrust Brokerage Services’ which may conflict with your interests. As a general matter, FinTrust Investment Advisors or its affiliates normally market and trade on an agency or riskless principal basis in fixed income securities discussed in our research reports.

Explanation of FinTrust Investment Advisors Fixed Income Research Ratings (where applicable):
FinTrust Investment Advisors uses the following ratings nomenclature:

Overweight – for varying periods up to twelve months, the recommended risk position is expected to outperform the relevant index, sector, subsector or benchmark for total return. Used interchangeably with Buy and Favor for buy & hold accounts.
Marketweight – for varying periods up to twelve months, the recommended risk position is expected to perform in-line with the relevant index, sector, subsector or benchmark for total return accounts. Used interchangeably with Neutral and Stable for buy & hold accounts.
Underweight – for varying periods up to six months, the recommended risk position is expected to underperform the relevant index, sector, subsector or benchmark for total return accounts. Used interchangeably with Avoid, and Sell for buy & holds accounts.Used interchangeably with Neutral and Stable for buy & hold accounts.

Other Disclosures:

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