| Thursday, September 14, 2017 | ||||||||
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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 |
| 9/7/17 | .98 | 1.05 | 1.15 | 1.21 | 1.27 | 1.38 | 1.63 | 1.88 | 2.05 | 2.40 | 2.66 |
| 9/8/17 | .96 | 1.04 | 1.14 | 1.22 | 1.27 | 1.39 | 1.64 | 1.89 | 2.06 | 2.41 | 2.67 |
| 9/11/17 | .97 | 1.05 | 1.16 | 1.24 | 1.32 | 1.44 | 1.71 | 1.96 | 2.14 | 2.49 | 2.75 |
| 9/12/17 | .99 | 1.03 | 1.16 | 1.27 | 1.33 | 1.46 | 1.75 | 1.99 | 2.17 | 2.52 | 2.78 |
| 9/13/17 | .99 | 1.04 | 1.16 | 1.27 | 1.35 | 1.48 | 1.78 | 2.01 | 2.20 | 2.53 | 2.79 |
Source: U.S. Department of the Treasury, as of 9/13/17
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WHAT-IF?
Most bankers spend a lot of time planning, budgeting, and in general, trying to anticipate potential challenges and opportunities down the road. In an effort to enhance this process let’s play a quick game of “WHAT-IF”.
What-if: Tomorrow morning the Fed raises the overnight funds target to 2.25%, and Prime moves to 5.25%, while the 10 year TN yield remains at 2.18%.
Will this rate move have a dramatic effect on your Cost of Funds (COF)? It might not be dramatic, but it will likely raise the cost of deposits, to some extent, for sure. First, do you have “Public Money” tied to overnight funds? Even if there is not a defined index, will your Public depositors expect a hefty increase in rate at renewal time?
And, even if you remain “calm”, what will your competitors do? Will they offer rates beyond the target increase in anticipation of further increases? The most likely “answer” to this what-if should be related to the current Loan/Deposit ratio and loan pipeline. If funding is an issue, be prepared to play the “funding game”! How you participate should have been mapped-out before the need arose. In other words, has there been a systematic review of the cost of the next marginal dollar (on deposits) and whether it should come from retail funding (money market, savings and NOW) or wholesale (CD’s, FHLB, or other). Review the current “state” of each account category (including tiers) and to what extent they might attract new money or possibly have already maxed out. Plan the least expensive rate hikes (this will take time and perhaps some guess work) in advance, to determine how you will most likely proceed.
Plus, remember Prime has increased 100 basis points too, so the rate hike might boost interest income as well. Are Prime based variable rate loans floored-out? What about lock-outs, will these loans reprice immediately, or be contractually locked-out for months, or even years? It is a really good idea to determine how much interest income will increase in the next year for each 25 basis point increase in Prime. This calculation will help planning of course, but will also point out the percentage of loans that are floored out, the rate movement needed to pierce the floors, and the length of lock-out periods, if any.
Lastly, some loans may be set to reprice that are tied to points along the treasury curve. Many banks have one year, three year or five year treasury indexes and this increase will generate more income. Again, the lock-out period may be the key. Hopefully, all variable rate loans default to a one year index after the initial lock-out period has elapsed.
The point of this simple exercise is simple, plan ahead. We most likely will never experience a 100 basis point rate shock, but reviewing and analyzing the key components of the balance is an extremely valuable tool.
Call us at AMG (800.226.1923) if we can help.
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.
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