Friday, February 22, 2019 |
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| MANAGING DIRECTOR: Scott Carrithers PORTFOLIO SALES AND SERVICE: Steve Panknin • George Morris • Jeff Goble • Chris Thompson • Sean Doherty Kevin Doyle • Lonnie Harris • Mark Tranckino • Robert Schuyler • Tom Toburen • Josh Kiefer Nicole Burczyk • Kelley Frye • Natalie Regan • Aaron Stoffer • Chuck Honeywell • Gus Koppen |
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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 |
| 02/14/19 | 2.45 | 2.43 | 2.51 | 2.53 | 2.50 | 2.48 | 2.48 | 2.56 | 2.66 | 2.85 | 3.01 |
| 02/15/19 | 2.43 | 2.43 | 2.50 | 2.55 | 2.52 | 2.50 | 2.49 | 2.57 | 2.66 | 2.84 | 3.00 |
| 02/19/19 | 2.44 | 2.45 | 2.52 | 2.54 | 2.50 | 2.47 | 2.47 | 2.55 | 2.65 | 2.84 | 2.99 |
| 02/20/19 | 2.41 | 2.45 | 2.51 | 2.54 | 2.50 | 2.47 | 2.47 | 2.55 | 2.65 | 2.84 | 3.00 |
| 02/21/19 | 2.43 | 2.45 | 2.51 | 2.55 | 2.53 | 2.49 | 2.51 | 2.59 | 2.69 | 2.89 | 3.05 |
Source: U.S. Department of the Treasury, as of 02/21/2019
Fed Funds Futures Curve
The Fed Funds futures curve on December 4, 2018, indicated the market was anticipating 3 probable rate hikes over the next twelve months. That would include the December 2018 rate hike plus two additional this year. This is illustrated in the graph below.
This information from early December told us that we should continue seeing short term rates moving up, which would continue to put pressure on funding costs. This supported a strategy of being short on the asset side which would help earning asset yields to reprice higher sooner.
However, things have now changed. In this month’s Pro Shop, we pointed to the lower probability of a Fed rate hike in 2019. The recent Fed minutes discussed slowing the balance sheet roll-off in 2019. This action from the Fed would place liquidity back in the market and put pressure on the 10 year Treasury yields again, potentially causing that yield to fall further from where we are now, which is roughly 2.69 percent as of February 21, 2019.
The current Fed Funds futures curve on February 20, 2019, shown below, now shows no expectation of a further rate hikes from the Fed. Additionally, the market is expecting the Fed Funds rate to start moving down in early 2020. If you believe what the market is expecting, then you should be looking to extend the duration on your assets and shorten your duration on your liabilities to maximize net interest margin in a declining rate environment. If this is the end of this rate cycle or economic recovery, then credit quality should be the highest level of concern.
However, things have now changed. In this month’s Pro Shop, we pointed to the lower probability of a Fed rate hike in 2019. The recent Fed minutes discussed slowing the balance sheet roll-off in 2019. This action from the Fed would place liquidity back in the market and put pressure on the 10 year Treasury yields again, potentially causing that yield to fall further from where we are now, which is roughly 2.69 percent as of February 21, 2019.
The current Fed Funds futures curve on February 20, 2019, shown below, now shows no expectation of a further rate hikes from the Fed. Additionally, the market is expecting the Fed Funds rate to start moving down in early 2020. If you believe what the market is expecting, then you should be looking to extend the duration on your assets and shorten your duration on your liabilities to maximize net interest margin in a declining rate environment. If this is the end of this rate cycle or economic recovery, then credit quality should be the highest level of concern.
Having a good understanding of your current balance sheet position to a changing rate environment, while having a strong trust in your ALM model, helps you make the best decisions. The BancPath Asset Liability Report provides our customers with the information needed to understand the current position of the balance sheet. In addition, the staff at AMG provides consultation and overall market advice to help management formulate strong strategic initiatives for the coming year. If you aren’t currently receiving the service and advice you expect from a strategic asset liability partner to truly manage your balance sheet and maximize your position, please reach out and would be happy to start a conversation.
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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