Last night I was in the kitchen when the wife came home from the grocery store. As she was putting the groceries away she announced that she had just bought some special apples that taste like grapes. Curious, I asked how much she paid for them. She responded with “I don’t know…why?”
“Because if they’re more expensive than grapes we just got robbed.” I replied. After all, why would I pay up to get something that “tastes like” grapes if I can get the actual grapes cheaper? She quickly brushed aside my economic commentary on our groceries and left the room. Tough crowd.
Many people will look at the “apples that taste like grapes” story as tale of a unique culinary/scientific achievement…but when I see these grape-flavored apples on my counter-top I see a sector-analysis story.
Why do these funky apples remind me of sector analysis? Because if I like grapes, but grapes are expensive, I might be able to find a really good grape-substitute in another part of the fruit world. In this case if I can get the grape-flavored apples cheaper than grapes themselves then there is some value available there and I’m willing to purchase them. Same grape taste in a little bit different package at a lower price? Great…sign me up.
This in turn leads me to the investment portfolio. If I’m an Agency Callable buyer, but callable yields have dropped, maybe I can find some yield in another product that has the same maturity/average life/price volatility characteristics.
How about an example?
A very recent example is in the world of Callable Agency bonds. Consider the following numbers:
A 3 year non-call 1 year with a one-time call will bring you a 0.75% yield today
A basket of 3 year CD’s with no call options, and zero risk weight will bring you a 1.50% yield (with the convenience of DTC delivery)
You get a lot more grapes for your money with the CD than with the callable. In fact you get twice as many grapes for the same price. Supplies are limited on the CD side so there is a limit before you have to go back to buying callables but it shows that you can occasionally get some shots off at much better levels if you keep looking in all areas.
Another example would be:
A 4 year non-call 3 month brings 1.125% with -11.00% price volatility this morning
A 10 year 3.00% MBS currently brings 1.65% yield in the base case with -11.00% price volatility
Again we get more grapes for our money.
Wrapping it up
If you’re looking to put money to work as we head into the end of the year remember to look around and pick up value where you can find it. Compare sectors and make sure you’re getting the most bang for your buck.
If you have any questions or if there is anything I can be doing for you just let me know.
Steve Scaramastro, SVP
800-311-0707
Posts
No comments:
Post a Comment