| Wednesday, September 13, 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 |
| 9/6/17 | 1.04 | 1.07 | 1.17 | 1.24 | 1.30 | 1.42 | 1.69 | 1.93 | 2.10 | 2.46 | 2.72 |
| 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 |
Source: U.S. Department of the Treasury, as of 9/12/17
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Shape Of The Yield Curve…
Analyzing Interest Rate Risk is an interesting exercise. Well, it can be interesting. It is undoubtedly necessary. And actually… quite complicated.
One simple complication is the shape of the yield curve. Most of us think of the yield curve as a gently sloping line at perhaps a 35 degree angle, with rates increasing as we increase maturity dates. In a perfect world yields would increase in proportion to the length of the maturities.
But, of course this is not really so. Currently the 2-year treasury is yielding about 1.34% and the 10-year treasury is yielding about 2.17%. This is obviously a fairly flat curve, and most likely it will continue to flatten given the lack of measurable inflation and the possibility of another Fed move later in the year.
The potential for further “flattening” is important because it may have an impact on your Interest Rate Risk Profile and Net Interest Income dollars at risk. It may not, but if the short end of the curve continues to increase in yield in response to further Fed tightening and the 10-year treasury continues to increase in price as its yield decreases, we could see a flatter, or even an inverted curve. And, historically, a flat curve tends to compress your “spread” (Yield on Earning Assets minus Cost of Funds) as deposit cost increase while rates received on loans or securities declines or remains the same.
Most ALM models include a “nonparallel yield curve shift” of some kind, so start by looking to those scenarios to determine what might happen as the curve flattens. The AMG model contains four nonparallel yield curve shifts including a “Most Likely”, “Bear Flattening”, “Bull Steepening”, and a “Curve Twist”. The Spread and Net Interest Margin (NIM) of most banks hold up pretty well in these scenarios, but remember, there has been very little pressure on deposit cost at this point. The Fed has made four 25 basis point moves to increase overnight funds 100 basis points, but most banks have increased deposit cost very little, if at all. Down the road the dam may break and deposit cost might sharply increase, stressing current deposit Betas and inflating COF overnight.
The dangers of a “flat” curve and a soaring COF scenario may be overstated here, but it should be considered. Discuss these possibility in your next ALCO, and formulate a game plan to deal with them. Is it time to extend liabilities now, even as the 10-year treasury is just above 2%?
Discuss the risk (maybe increasing COF needlessly) and the reward, less pain down the road. It pays to be prepared.
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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