Been down so long, it looks like up to me When will rates move up, and how to prepare NCSHA Annual Conference October 21, 2014 Swap Financial Group Peter.

Been down so long, it looks like up to meBeen down so long, it looks like up to meWhen will rates move up, and how to prepareWhen will rates move up, and how to prepare

NCSHA Annual ConferenceOctober 21, 2014

Swap Financial GroupPeter Shapiro76 South Orange Avenue, Suite 6South Orange, New Jersey 07079973-378-5500

Unprecedented last six yearsUnprecedented last six years

In prior crises, rates have quickly recovered

We are still waiting for ‘mean reversion’

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Last 50 Years (Benchmark 10-Year US Treasury)

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Last 43 Years (Fed Funds)

Unprecedented

Inflection point: 2015Inflection point: 2015

Fed has stated clear intentionsUS economy strengthening, esp. last two

lagging legs of housing and laborMarkets still suffer from PTSD – pricing

in the risk of disaster, despite evidence to the contrary

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Fed Funds Target Rate ProjectionsFed Funds Target Rate Projections

6

FOMC member votes

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Since January 2008 (Benchmark 10-Year US Treasury)

Lehman Euro crisis

QE taper

Huh?

The Enigma of Long-Term Rates

Enigma of long-term ratesEnigma of long-term rates

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Will long rates wait till Fed tightening begins? Probably not

Most dangerous investment right now: Long-term bonds

Converse: The best time to borrow is right now

Think about: Locking in today’s rates for known future needs

Swaps outperformed muni bondsSwaps outperformed muni bonds

Upper line (white): 30-yr muni bondsLower line (orange): 67% Libor swap

Spread between bonds and swaps

Fearless rate predictionsFearless rate predictions

Year-end 2015 – LIBOR (3-mo): 1.50 SIFMA: 0.8510-yr Treasury: 3.2530-yr MMD: 3.75

Year-end 2016 – LIBOR (3-mo): 3.00 SIFMA: 2.00 10-yr Treasury: 4.50 30-yr MMD: 5.00

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Cost of bank facilities skyrocketed . . .Cost of bank facilities skyrocketed . . .

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. . . but prices have dropped steadily. . . but prices have dropped steadily

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Bank LOC outlookBank LOC outlook

Continued low demand will keep LOC costs low

Bank instability/regulatory environment will require issuers to be agile

Alternative structures will continue to play a big role

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Alternatives are growingAlternatives are growing

Direct Purchase programs Floating Rate Notes (SIFMA and

LIBOR)Extendables (“windows”)Synthetic floating (via swap)

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Example: Boston UniversityExample: Boston University

SwapDealer

1.265%

Bond Holder

Floating Index(SIFMA)

1.50%

BostonUniv

• Ratings: A1/A• Issued 5-yr bond @ 1.50% (MMD plus 32)• Swap to floating (pay SIFMA , receive 1.265%)• Net: SIFMA + 23.5 bps• No remarketing cost or risk• No bank LOC/liquidity cost• No bank covenants• No basis risk • Key risk: counterparty risk

But reverse direction

All-in cost:SIFMA + 23.5 bps