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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
2222 Kalakaua Avenue

Suite 1400
Honolulu HI 96815

Phone: 808.791.9888
Fax: 808.791.9898
info@kamakuraco.com

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A survey done a few years ago of the interest rate risk managers for the largest U.S. and Canadian banks confirmed some common elements in their approaches to asset and liability management. First, more than 90% of the respondents used just one yield curve as the “base yield curve” for valuation and profitability analysis. Second, this curve almost universally the U.S. dollar interest rate swap curve. Since that survey was taken, interest rate swap spreads have been negative at many maturities and massive fines have been paid by major banks for manipulation of Libor, the short term interest rate at the heart of interest rate swap spread setting. This note show how to improve the accuracy of transfer pricing and valuation in asset and liability management by eliminating the use of the interest rate swap curve, replacing it instead with the U.S. Dollar Cost of Funds IndexTM. We use traded bond price data for KeyBank N.A. and its parent KeyCorp to illustrate the process.

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In this note, we update ourAugust 12 study with more evidence of whether or not there is a funding advantage for the “too big to fail banks.” We use the Kamakura U.S. Dollar Cost of Funds Index TM, which represents the composite credit spreads of the four largest deposit-taking U.S. banks. Currently, four banking firms underlie the U.S. Dollar Cost of Funds Index: Bank of America (BAC), Citigroup (C), JPMorgan Chase & Co. (JPM), and Wells Fargo & Co. (WFC).

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Kamakura Corporation projections for U.S. Treasuries and fixed rate mortgages this week show that the implied forward yields for 15 year fixed rate mortgages rise from a current effective yield of 3.327% (down 0.03% from last week) to 5.488% in 10 years, down 0.027% from last week. The all-in yield on 30 year fixed rate mortgages dropped 0.028% from last week to reach 4.170%, the same level as two weeks ago. The value of net servicing for both 15 and 30 year fixed rate mortgages was mixed relative to last week, with the value of net servicing dropping 0.34% for 30 year mortgages.

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In this note, we present some initial evidence of whether or not there is a funding advantage for the “too big to fail banks.” We use the Kamakura U.S. Dollar Cost of Funds IndexTM, which represents the composite credit spreads of the four largest deposit-taking U.S. banks. Currently, four banking firms underlie the U.S. Dollar Cost of Funds Index: Bank of America (BAC), Citigroup (C), JPMorgan Chase & Co. (JPM), and Wells Fargo & Co. (WFC).

Conclusion: One day’s trading evidence is not definitive, but we find that traded credit spreads were lower than the U.S. Cost of Funds Index for five of the seven “regional” banks with traded bonds on August 11, 2014. One of the other two banks, Ally Financial (ALLY), had traded credit spreads well above the U.S. Cost of Funds Index, but Ally Financial itself was the beneficiary of a rescue by the U.S. government.

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We last ranked the best value 10 year fixed rate corporate bond issues on August 4, 2014. Today we rank the best value corporate bond trades with daily trading volume of at least $5 million and maturities of 10 years or longer on August 11, 2014. On August 11 in the U.S. bond market, there were 15,965 bond trades in 2,959 senior non-call fixed rate corporate bond issues representing $3.8 billion 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 10 years or longer.

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