The Yield Forecaster™ is a portfolio management and budgeting tool that has been created to assist financial institutions with projecting portfolio yields and income over the next 27 months. As you would expect, this tool uses your portfolio information and assigned reinvestment rates to compute projected yields in the future for multiple rate environments. However, we have added a few “bells and whistles” which will enhance the budgeting process and give the user the ability to customize the report to fit their investment style, interest rate forecast, and anticipated portfolio changes.
How it works
First the Basics
The Yield Forecaster uses the individual book yields and the individual cashflows for each security to determine future months’ projected book yield. As individual bonds roll off (prepay, mature, or get called), the model will remove the income associated with that pay down from the weighted average book yield for that month and replace it with the new reinvestment rate. The model will also reflect the changes in cashflow that occur in different rate environments.
We will calculate the monthly cashflows for each security in the base case, up 100, and down 100 scenarios for your portfolio. Using this information, you will be able to assign a monthly reinvestment rate. You will also be directed to determine the duration of the reinvestment for future cash flows. By designating duration, you set a maturity date along with a reinvestment rate for the “new investment”. The reinvestment security will now have prepayment characteristics as well that can be reinvested at higher or lower rates in later months, based on your inputs. For example, if we have $1 million of prepayments from our mortgage-backed portfolio in the first month, we can assign a reinvestment rate of 3.50% and duration of 14 months for the “new investment”. The Yield Forecaster will recognize the prepayment of the new investment and reinvest that amount at the future month’s reinvestment rate. The Yield Forecaster also provides you with the ability to reinvest in overnight funds, which adjust monthly or bullet structures.
This can be helpful for institutions who project that the nature of their reinvestment will change over time. For example, in the current rate environment, many institutions maintain a shorter duration and lower investment yield in anticipation of rising rates. In that case, the Yield Forecaster gives them the ability to assume a lower reinvestment rate and shorter duration over the next 12 months and, thereafter, use a higher reinvestment rate coupled with a longer duration.
The Yield Forecaster is provided to you as a Microsoft Excel spreadsheet. It gives you the ability to manipulate the assumptions regarding reinvestment and duration at your leisure. The balances in the report can be copied into your board reports or used to create graphs for discussion.
How it works for you
The Yield Forecaster can be used in a number of ways. The most obvious application is for income planning and budgeting. The portfolio’s monthly and annual incomes can be projected using assumed pay downs and reinvestment rates (with level, rising or falling rates) to give monthly and annual portfolio yields and income.
The system can also be used to develop “break-even” reinvestment rates. In other words, reinvestment rates can be adjusted up or down. The projected reinvestment rate that causes the final portfolio yield to be equal to the beginning portfolio yield is the breakeven yield for the period. Any investments made during the year at a rate greater than the “break-even” reinvestment rate will result in greater annual incomes.
What we need to provide you with a report
We will need the following portfolio information to provide you with the Yield Forecaster.
Investment Portfolio Data Required:
- FASB 115 Status (AFS/HTM)
- Purchase Date (mm/dd/yy) (optional)
- Purchase Price (optional)
- Original Face
- Current Par
- Book Price
- Book Value
- Book Yield
- Book Date (mm/dd/yy)
If you would like to receive a complimentary copy of the Yield Forecaster report, please contact your account representative.