By: Russ Kamp, CEO, Ryan ALM, Inc.

One year ago today, the 2-year Treasury note was trading at a yield of 3.99% and the 30-year Treasury bond had a yield of 4.55% for a very tight 56 basis points spread. What a difference a year makes. Coming into trading this morning, the 2-year Treasury note yield had fallen 0.21% during the last 12-months, while the yield on the 30-year Treasury Bond had risen by 34 bps. The spread between 2s and 30s is now 1.11%!

The steepness of the yield curve is hugely advantageous for cash flow matching (CFM) assignments going out 20- to 30- years. As Ron Ryan likes to point out, BOND math is pretty straightforward: the longer the maturity and the higher the yield, the lower the cost of those future promises. We’ve regularly been producing portfolios with YTMs of between 5.25% and 5.40%. This despite significant tightening within the investment grade corporate bond universe.

For funds (pension and E&F) searching for liquidity and hoping to secure the next 5-years of benefits or grants (and expenses), the YTM on your mandate would be closer to 4%. Geopolitical risk is keeping U.S. interest rates at or slightly above long-term levels. It doesn’t appear that the Fed’s FOMC is in any hurry to reduce rates given the recent and continuing oil shock. While uncertainty reigns, don’t hesitate to reach out to us for a free analysis to highlight how CFM could help bring an element of certainty to your fund and a great night’s sleep for you and the participants.