FMS Boston Chapter CBA Feb 2019... · Current Economic Environment Atlantic Capital Strategies, Inc. 3 Present Conditions 2018 GDP-2.9% (Est.) • 2.2% - 2017 • 1.6% - 2016 Steady

FMS Boston Chapter & CBA

FEBRUARY 13, 2019

INVESTMENTS UPDATE

Atlantic Capital Strategies, Inc.

Atlantic Capital Strategies, Inc. 1

Outline

Current Economic Environment

Interest Rate Outlook

Investment Strategies

Back Testing Tools



Key IssuesPolitics

Trade Policy

Stock Market Volatility

Central Bank Policy



Present Conditions 2018 GDP-2.9% (Est.)

• 2.2% - 2017 • 1.6% - 2016

Steady Job Growth- 220,000 per month in 2018• Compared to 215,000 per month in 2016 and 175,000 in 2017 • Unemployment rate at 50-year low

Slowing Housing Market- home prices increasing 5% annually

Retail sales inconsistent during 2018

Inflation near Fed’s 2% target for ten consecutive months

Current Rate Environment


Bond Market Rally

Global Growth Concerns

Fed Policy

Muted Inflation Expectations

Flight to Quality

Yield Curve Signal


False Signal

Recession Causes


Excess investmentLeverageFed raises short-term ratesSurge in oil pricesShock leading to loss of confidence

Recession Causes


1991• Real Estate – tax reform sunk property values• Fed funds - 6.50% to 9.75%• 1990 Oil price shock – 264% increase• Gulf War

2001• Tech Boom and Y2K scare• Fed funds - 4.75% to 6.50%• Surge in energy demand - 308% increase• 9/11

2009• Real Estate - bubble spurred by sub-prime lending• Fed funds - 1.00% to 5.25%• Peak gasoline usage – 280% increase• Lehman

Current Concerns


Leveraged Loans

Sovereign Debt

Corporate Borrowing

Commercial Real Estate

Sustained Low Rate Environment

There is always a “Wall of

Worry”

Debt vs. Net Worth


Relative StabilityPeaked in the mid-1990s

Key Political Factors


China Trade Deal

Brexit

Partisan Divide in Washington

After March, investors will focus on underlying economic growth and inflation


Unemployment Rate

50-Year Low

Inflation - US


Near Fed’s 2% Target

Existing Home Sales


Decline in Affordability

Manufacturing


Trade Impact


Consumer Confidence

Political Concerns

Participation Rate


Highest Since 2013

Hourly Wages


Steady Growth

Consumer Debt


Improving Balance Sheets

Oil Prices


Tax Cut #1

Mortgage Rates


Tax Cut #2

Stock Market


Bouncing Back in 2019

Stocks & Bonds


High Correlation!

Interest Rate Forecast

Current Market Economist Survey2019 2020 2021 2019 2020 2021

FF 2.50% 2.50% 2.50% 2.50% 2.75% 2.75% 2.75%

2-Y T 2.45% 2.40% 2.40% 2.45% 2.85% 2.80% 2.75%

10-Y T 2.65% 2.70% 2.75% 2.85% 3.00% 3.05% 3.15%


Some estimates are used

Federal Reserve Commentary


Jerome PowellOctober 2018

“The really extremely accommodative low interest rates that we needed when the economy was quite weak, we don't need those anymore. They're not appropriate anymore.”

“Interest rates are still accommodative, but we're gradually moving to a place where they will be neutral," he added. "We may go past neutral, but we're a long way from neutral at this point, probably.”



Jerome PowellNovember 2018

“Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy -- that is, neither speeding up nor slowing down growth.”



Jerome PowellDecember 2018

“We’re now at the bottom end of the range of estimates of neutral. Especially in an environment of muted inflation pressures, the committee could afford to be patient about further policy firming."



Jerome PowellJanuary 2019

“Over the past few months we have seen some cross-currents and conflicting signals about the outlook. The case for raising rates has weakened somewhat."

Cause for Pause


Lagged effects of tightening

Slowdown in global growth

Stock market volatility

Yield curve signal

Fed Dot Plot


Two more hikes this year

Fed Funds Futures


Fixed vs. Floating


Fixed-Rate Bond

Fixed vs. Floating


Floating-Rate Bond

Fixed vs. Floating


Bond 1 Bond 25-Year Fixed-Rate Bond 5-Year Floating-Rate BondTreasury + 1.04% (3.62% Yield) 3-Mo LIBOR + 1.01% (3.76%Yield)Index - 2.58% Index - 2.75%

Income Comparison Based on Market Forecast ($1 MM Investment)

Year 1 $36,200 $37,600Year 2 $36,200 $37,600Year 3 $36,200 $37,600

Total $108,600 $112,800

Fixed vs. Floating


ConsiderationsALCO position

Yield curve shape

Volatility of credit spreads

Potential income at risk

What’s the rate going to be on the back side?

Corporate vs. Muni


Corporate vs. Muni


Corporate vs. Muni


Corporate vs. Muni


The Case for CorporatesMunicipal Bond Corporate Bond

Issuer Bloomfield, CT. Bank of AmericaMaturity 01/15/34 04/19/26Duration 11.95 6.25

Yield (21%) 3.87% TE 3.83%

Median Rating AAA ARisk-Weight 20% 100%

Corporate vs. Muni


ConsiderationsPledging requirements

Risk weighting

Headline risk

Marketability

Agency CMBS


Agency CMBS


Agency CMBS


Agency CMBS


Agency Alternative


Agency Alternative


Agency Alternative


Agency CMBS vs. Callable


The Case for Agency CMBSCMBS Callable

Issuer FNMA FHLBMaturity 07/24/24 02/14/24Duration 4.82 4.61

Yield 3.05% 3.00%

Risk-Weight 20% 20%Call Protection 4 Years 1 Year

Agency CMBS


ConsiderationsCall protection

Yield maintenance

Bullet alternative – pick up 30 basis points

Potential for price appreciation

High premium avoidance

Best Execution


Risk Management Process

Monitor, manage and control risks related to investment activities

Essential component of safe and sound practices Prudent for management to fully understand all relevant

market and transaction risks Put systems in place to assure that all reasonable efforts are

made to obtain the most favorable price for each securities transaction

Best Execution


Price Discovery

Over the counter market “Pre-trade” pricing information (bids and offers) is relatively

limited Markets remain decentralized “Post-trade” reporting systems advancing

• Bloomberg• EMMA• TRACE• FINRA

Best Execution


Best Execution


Example Municipal Bond $750,000 Trade Date 01/30/19 Book Yield 3.01% Pre-Tax

Initial Trade 98.751 Next Trade 100.726

Markup (%) 1.975% Markup ($) $14,812

Best Execution


Back Testing Analysis

Improve profitability Establish system for evaluating broker / dealer performance Strengthen risk management policies and procedures Maintain compliance with regulatory requirements

Keep in mind that best execution does not always mean the lowest possible price

FINRA Priorities


FINRA Exam Priorities – 2019

Review firms’ compliance with their mark-up or mark-down disclosure obligations

Review for compliance regarding best execution, trade and order reporting

Review firms’ best execution decision-making where the firm routed all or substantially all customer orders to a small number of wholesale market makers

Assess how firms check additional venues for potential price improvement

Recap


One or two rate hikes in 2019 Flat yield curve – may not invert Growth slowdown in 2019 Floating-rate bonds may appeal to some institutions Improving valuation for corporate bonds Favor Agency CMBS over Agency callables Best execution analysis for improved profitability Maintain optimal duration

Profile


Bob Segal is founder and chief executive officer with Atlantic Capital Strategies, Inc. Bob has been in the banking industry since 1982, having worked in several community banks with roles in mortgage banking, sales and trading, and asset liability management. He is a frequent contributor to many regional and national finance publications, writing on the capital markets, technology and risk management.

Atlantic Capital Strategies, Inc.www.atlanticcapitalstrategies.com

(781) 276-4966

Documents

FMS Boston Chapter CBA Feb 2019... · Current Economic Environment Atlantic Capital Strategies, Inc. 3 Present Conditions 2018 GDP-2.9% (Est.) • 2.2% - 2017 • 1.6% - 2016 Steady