Yield Curve Steepening a Positive for FMD

The 10-year Treasury minus the 3-month T-Bill is now a positive 3 bps. This is good news for FMD as management was worried on the last conference call about the inverted yield curve causing increasing prepayments (borrowers consolidating short-term variable loans for long-term fixed). At the time, management thought that the inverted yield curve would persist for some time so they increased the prepayment assumption which lowered earnings marginally and caused analysts to cut estimates somewhat.

I continue to believe that all of the worries about FMD - potentially increasing defaults and prepayments, potentially lower loan volume with BofA and JPM because of a pending minority private equity stack in SLM, and potentially lower profitability from new legislation - are way overblown creating one of the best risk/reward opportunities that I've seen in years.