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Let’s Talk About: Rates

What you should focus on is the credit quality of the borrower.

The first person I worked for gave me the best advice on predicting interest rates DON’T. Never have never will.

Since we at Banyan invest with a hold to maturity slant (we are strategic vs tactical) the only equation we solve for is how much do you need each year and we give you the amount we need to invest at current market rates. The municipal market is trading on the long end just over 3% tax free. Doesn’t sound like much but with the 30 yr Treasury at 2.2% that’s 140% over not including the tax effect So if you need $100,000 a year, we’d need a little over $3 million to invest.

The inversion of the yield curve. (That’s where short term bills are at a higher yield than 10 year notes) is concerning because the Fed has boxed itself in through rhetoric (ie they talk too much) and an unclear view of how to address the US economy vs the Global economy. There is a distinct difference between the Strength of our economy and the weakness seen around the world.

This week we saw the Fed open market operations for the first time in a decade supply liquidity to the market. Overnight rates traded as high as 10%. Too long a discussion for here but the main takeaway is the NY Fed dusted off their adding machines and went to work providing liquidity to the market. While this is newsworthy it has little effect on the rate environment.

What you should focus on is the credit quality of the borrower. Am I a lender looking to get my money back with interest at a speculator believing that the credit quality of a company is improving and the current yield I’m receiving is greater than what I think it’s worth in the future? We at Banyan are only lenders (bond buyers) looking to get our money back with interest.

Take a real interest (no pun intended) in the credit (rate) side of the market. This will give you an idea of what minimum level of return you should expect. I’ve found the credit managers are much smarter than equity managers because at the end of the day we can grasp the facts of a company and determine whether the cash flow supports repayment. Equity managers can only guess.

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