Rising Rates and RMBS

The economic recovery since last spring and the degree of fiscal and monetary support are unprecedented. While the Fed is committed to keeping the target Fed Funds rate near 0% for several quarters, and the $120 billion monthly purchase of Treasuries and Agency MBS through the current Quantitative Easing (QE) program is likely to last until at least late this year, our view is that rates resume rising as the economy re-opens and Federal Reserve intervention ends. The 10-year Treasury yield rose from a low of 50 basis points last August and 90 basis points last December to about 1.2% currently – peaking at 1.7% recently – is likely a preview of things to come. The two-year Treasury yield briefly rose from about 15 to 25 basis points this summer, a reflection of the approaching change in the Fed’s intentions. We expect short rates – including the base rate for floating rate coupons – to follow the lead of intermediate rates higher this year.

Real estate is historically an effective inflation hedge, and we believe that loan performance will remain strong, supporting RMBS credit quality and working in tandem with low duration to support RMBS prices.

DISCLOSURES:

Opinions expressed in this document represent the views of Semper Capital Management, L.P., are valid only as of the date indicated, and are subject to change without notice. There can be no guarantee that any of the opinions expressed in this document or any underlying position will be maintained at the time of this presentation or thereafter. We are not soliciting or recommending any action based on this material. The information contained herein has been prepared solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any securities.

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