An Update on our Treasury Crossover

Dexter Torres and Kenneth Potts
Dexter Torres and Kenneth Potts

Growing fear and uncertainty surrounding the spread of the “Novel Coronavirus” has led to market volatility and a subsequent flight to quality in recent weeks. These conditions have greatly benefited the Treasury crossover trade we implemented in our Tax Efficient strategies.  In mid-January, short end Municipal-Treasury ratios fell into the mid 50% range which is one of the lowest levels seen in over 30 years. During that time, we increased our Treasury allocation to a target of 10-15% of portfolios with expectations that the relation would normalize. Recent developments in the market have caused Treasuries to greatly outperform municipals to the point where short end ratios have increased to almost 100%. We are currently in the process of taking profits in the crossover trade by selling a portion of the Treasury position and buying high quality municipals which now appear very cheap to Treasuries.

2 Year AAA Municipal/Treasury Ratio

Sources: Thomson Reuters, JP Morgan as of March 3, 2020.

Kenneth Potts
Senior Vice President & Portfolio Manager

Dexter Torres, CFA
Senior Vice President & Portfolio Manager, Head of Trading