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Wednesday, September 26, 2018 |
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MANAGING DIRECTOR: |
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US Treasury Market |
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| Date | 1 mo | 3 mo | 6 mo | 1 yr | 2 yr | 3 yr | 5 yr | 7 yr | 10 yr | 20 yr | 30 yr |
| 9/19/18 | 2.03 | 2.16 | 2.36 | 2.58 | 2.81 | 2.89 | 2.96 | 3.04 | 3.08 | 3.16 | 3.23 |
| 9/20/18 | 2.03 | 2.17 | 2.37 | 2.58 | 2.81 | 2.89 | 2.96 | 3.03 | 3.07 | 3.15 | 3.21 |
| 9/21/18 | 2.05 | 2.18 | 2.38 | 2.58 | 2.81 | 2.89 | 2.95 | 3.03 | 3.07 | 3.14 | 3.20 |
| 9/24/18 | 2.07 | 2.22 | 2.38 | 2.60 | 2.83 | 2.89 | 2.96 | 3.04 | 3.08 | 3.15 | 3.21 |
| 9/25/18 | 2.12 | 2.21 | 2.38 | 2.59 | 2.83 | 2.91 | 2.99 | 3.06 | 3.10 | 3.17 | 3.23 |
Source: U.S. Department of the Treasury, as of 09/25/2018
How Far Should We Extend on the Deposit Curve?
As discussed yesterday, liquidity is a growing concern for most community banks. Today, we’ll address two specific issues related to funding. Let’s assume all other relevant issues have been addressed, and the only questions that remain are: Should we fund retail with Time Deposits, or, should we fund wholesale? Secondly, how far out the funding curve should we extend, assuming overnight borrowing is not an option?
First is the question of retail CDs or wholesale funding, including brokered CD’s and term advances? There may be several franchise reasons for preferring retail CDs. A community bank may just want to be “active” in their community. There is (arguably) market value and positive PR value by offering a big fat juicy CD rate to the customer base, in an effort to pick-up new deposits. New customers are important, and yes, even a CD customer with no other connection to the bank is still a customer. But, can you “leverage” the new relationship into other products to generate income? Or, do you just have a “shopper” who is only loyal to an attractive rate?
Beyond any emotional component is the marginal cost of raising “new” deposits. As everyone knows, the real cost of a CD special is far greater than the new deposits, when you consider the “migration” of existing customers. Count on a significant number of existing customers to abandon lower cost products to take advantage of the new, higher rate. As we discussed in detail last week, we offer a “Marginal Cost Analysis Calculator” to all existing AMG clients, which comes fully loaded with the banks deposit structure. In almost all cases the CD special is more expensive, at least in terms of hard dollar expense, than almost all brokered deposits at this point. A retail deposit may be the best answer for many reasons, but cost is not one.
Secondly, how far should we extend on the “funding curve”? Unless we know future borrowing rates, the answer to this question is unknowable. But, we do know the current business cycle is one of the longest in our history and the economy has been gaining steam for couple of years. Many are projecting the FED to raise the overnight target rate again in December and possibly three more times in 2019. As such, there’s the looming possibility of an inverted yield curve, which could happen sooner than, rather than later.
So, what’s the takeaway from all of this? Why not lock-in three to five year funding? Additionally, if you go five years or longer, brokered CDs that are freely callable after one year should be considered. While nobody knows the future, its possible borrowing rates could reverse direction and decline in the next several years. The major caveat is that current rates may be so artificially low (due to the FED’s 4 plus trillion holding of our debt) that rates may continue increasing for a long time. And, if we have an unexpected round of inflation …?
If we can help, call AMG at 800.226.1923.
First is the question of retail CDs or wholesale funding, including brokered CD’s and term advances? There may be several franchise reasons for preferring retail CDs. A community bank may just want to be “active” in their community. There is (arguably) market value and positive PR value by offering a big fat juicy CD rate to the customer base, in an effort to pick-up new deposits. New customers are important, and yes, even a CD customer with no other connection to the bank is still a customer. But, can you “leverage” the new relationship into other products to generate income? Or, do you just have a “shopper” who is only loyal to an attractive rate?
Beyond any emotional component is the marginal cost of raising “new” deposits. As everyone knows, the real cost of a CD special is far greater than the new deposits, when you consider the “migration” of existing customers. Count on a significant number of existing customers to abandon lower cost products to take advantage of the new, higher rate. As we discussed in detail last week, we offer a “Marginal Cost Analysis Calculator” to all existing AMG clients, which comes fully loaded with the banks deposit structure. In almost all cases the CD special is more expensive, at least in terms of hard dollar expense, than almost all brokered deposits at this point. A retail deposit may be the best answer for many reasons, but cost is not one.
Secondly, how far should we extend on the “funding curve”? Unless we know future borrowing rates, the answer to this question is unknowable. But, we do know the current business cycle is one of the longest in our history and the economy has been gaining steam for couple of years. Many are projecting the FED to raise the overnight target rate again in December and possibly three more times in 2019. As such, there’s the looming possibility of an inverted yield curve, which could happen sooner than, rather than later.
So, what’s the takeaway from all of this? Why not lock-in three to five year funding? Additionally, if you go five years or longer, brokered CDs that are freely callable after one year should be considered. While nobody knows the future, its possible borrowing rates could reverse direction and decline in the next several years. The major caveat is that current rates may be so artificially low (due to the FED’s 4 plus trillion holding of our debt) that rates may continue increasing for a long time. And, if we have an unexpected round of inflation …?
If we can help, call AMG at 800.226.1923.
This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.
•Not FDIC Insured •No Bank Guarantee •May Lose Value