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Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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Kamakura Corporation
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Projected one month bill rates dropped by more than 0.30% in 2020 to 2024 in a delayed response to comments last week by Fed Chairman Janet Yellen. This is the first implied peak in one month bill rates for a few years. The forecast also shows projected 10 year U.S. Treasury yields rising steadily to 4.056% in 2024. Projected 15 year fixed rate mortgage yields in 2024 show a rise from an all-in cost of 3.507% today to 5.97% in 2024. We also present three potential scenarios consistent with the implied forecast that represent alternative paths for interest rates. These scenarios are consistent with a multi-factor rate model benchmarked in 52 years of U.S. history, discussed below. Here are the highlights of this week’s implied forecast:

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Projected one month bill rates for 2016-2018 rose by more than 0.20% this week after comments by Fed Chairman Janet Yellen on Wednesday. The forecast also shows projected 10 year U.S. Treasury yields up 0.04% to 0.13% from last week while fixed rate mortgage yields are about 0.04% lower.  Mortgage yields, determined by the Monday through Wednesday weekly survey of the Federal Home Loan Mortgage Corporation, lag Treasury movements simply because of the 3-day yield calculation used in the Primary Mortgage Market Survey ®. We also present three potential scenarios consistent with the implied forecast that represent alternative paths for interest rates.

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Prudential Financial Inc. (PRU) is one of the largest financial institutions in the United States and one of the strongest firms in the industry from a credit risk point of view. Still, in these notes, we make no assumptions and let the facts lead us to our own independent conclusions. Today’s study incorporates Prudential Financial Inc. bond price data as of March 19, 2014 to get an institutional, bond market view of the company. We analyze the potential risk and return to bondholders of Prudential Financial Inc. using 98 trades on 21 bond issues and a trading volume of $63.3 million in today’s analysis.

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On March 18 in the U.S. bond market, there were 33,863 bond trades in 5,195 non-call fixed rate corporate bond issues representing $3,892,197,918 in notional principal. Which 20 trades were the best trades of the day, and how do we decide the answer to that question? Today, we answer those questions for bonds with maturities of 1 to 5 years at the request of many investors. This question is particularly important in light of the tight pricing on the rare $5.5 billion bond issue by Exxon Mobil (XOM) on the same day. We compare the Exxon Mobil deal to all other large trades in the market.

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In our analysis on March 5 “Stress Testing and Interest Rate Risk Models: How Many Factors are Necessary,” we address three key questions:

  • How do you measure the accuracy of an interest rate risk simulation technique?
  • Given that measure of accuracy, how many risk factors are necessary?
  • How does accuracy change as the number of factors increases?
     

 

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