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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Swap Financial Group 3
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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Swap Financial Group 11
Cost of bank facilities skyrocketed . . .Cost of bank facilities skyrocketed . . .
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. . . but prices have dropped steadily. . . but prices have dropped steadily
0
20
40
60
80
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120
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