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Kamakura Corporation projections for U.S. Treasuries and fixed rate mortgages this week reflected the 0.06% fall in current 15 year and 30 year fixed rate mortgage all-in yields. This week’s projections show that the implied forward yields for 15 year fixed rate mortgages rise from a current effective yield of 3.372% (down 0.06% from last week) to 5.359% in 10 years, down 0.06% from last week. The all-in yield on 30 year fixed rate mortgages was down 0.061% at 4.162%, after the fall in long term Treasury yields of 0.07% to 0.12% at maturities from 2 to 30 years. The value of net servicing for 30 year fixed rate mortgages rose 0.06% this week.

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The dramatic announcement on October 5 that Hewlett-Packard Company (HPQ) would split in two has very important implications for both common shareholders and bond holders. We update our assessment of the risk and return on Hewlett-Packard Company bonds in light of the October 5 announcement. Hewlett-Packard Company ranks number 31 on the Forbes list of the world’s most valuable brands. We have seen often in this series of notes that there can be brand premium in bond prices that often keeps brand name companies from being “good value” for bond investors. In this note, we examine that question for Hewlett-Packard Company.

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Forward 1 month T-bill rates fell again this week, dropping at every monthly maturity for the next 10 years. The fall in implied forward 1 month Treasury bill rates stems from a decrease of 0.05% to 0.08% in current U.S. Treasury yields in the 5 to 30 year maturities. Forward 1 month T-bill now rise steadily until reaching a peak at 3.39% in April, 2021, a peak 0.10% lower and two months later than last week. The implied forecast also shows forward 10 year U.S. Treasury yields rising to 3.53% in 2024, down 0.09% from last week.

We also present three potential scenarios consistent with the implied forecast that represent alternative paths for interest rates.

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Kamakura’s troubled company index showed a new record for all-time best credit conditions on August 4, 2014. The massive credit crisis lawsuits against the largest banks in the land are steadily moving toward resolution. At the same time, the new top management team at Citigroup has been pruning its world-wide businesses to restore the firm to profitability. In light of these developments, we review traded bond prices of both Citigroup Inc. (C) and its financial services peers to reach conclusions about these questions:

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Stress testing-based risk management analysis is now a critical element of financial institutions’ financial strategy. Stress testing regimes like the Federal Reserve’s 2014 Comprehensive Capital Analysis and Review require a five step process:

  1. Macro-economic factors are shifted
  2. Default probabilities of all counterparties move in response
  3. Credit spreads of all counterparties move in response
  4. Valuations of all extensions of credit then shift
  5. The institution’s own default risk, capital position, and liquidity position shift as well

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