Tuesday, December 12, 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 |
| 12/05/17 | 1.21 | 1.30 | 1.48 | 1.64 | 1.83 | 1.94 | 2.15 | 2.28 | 2.36 | 2.55 | 2.73 |
| 12/06/17 | 1.18 | 1.30 | 1.48 | 1.68 | 1.78 | 1.92 | 2.11 | 2.25 | 2.33 | 2.53 | 2.71 |
| 12/07/17 | 1.16 | 1.29 | 1.47 | 1.67 | 1.80 | 1.92 | 2.14 | 2.29 | 2.37 | 2.58 | 2.76 |
| 12/08/17 | 1.14 | 1.28 | 1.45 | 1.65 | 1.80 | 1.92 | 2.14 | 2.29 | 2.38 | 2.59 | 2.77 |
| 12/11/17 | 1.18 | 1.33 | 1.47 | 1.69 | 1.82 | 1.95 | 2.16 | 2.30 | 2.39 | 2.59 | 2.77 |
Source: U.S. Department of the Treasury, as of 12/11/17
Looking Forward, What Should We Do?
The yield curve continues to flatten with the spread between the 2-year and 10-year Treasuries at about 56 basis points this morning. A 25 basis point move by the Fed appears baked into the yield curve at this point, so the question becomes, what is the Fed going to do next year and what affect will it have on community banks? Not surprisingly, there are varying opinions on the Fed’s decisions next year, but the dot plot used by the Fed indicates three moves next year, with the possibility of two in 2019. Obviously many things can change but let’s review a few possibilities and strategies for each.
First, let’s assume overnight funds are 2.25% a year from now with the possibility of a few more increases. Our strategy will, in part, depend on where the 10-years Treasury is. Let’s assume there has not been “much” inflation (less than 2%), and the 10-year is at 2.50%. The yield curve will be even “flatter” at this point, moving dangerously toward the feared “inverted” curve.
Assuming there may be a few rate changes in 2019 (overnight would be 2.75% after two more moves), but not more, the issuance of a two or three year brokered CD would be a good move. First, it would be long enough to get through the initial rate increase period, and secondly, it would be short enough to let you catch your breath on the other side. The 2-year costs about 2.05% today, and the 3-year rate is about 2.15%. These rates do increase cost initially, but will be less expensive over the term of either CD. If you think rates are going to climb for a “long” time, issue a 5-year CD at about 2.40%, or 2.50% if you want to own a call, which might come in handy if rates crater at some point. Regardless, if you think rates are going up and you have any funding issues at all, take down some longer advances, or issue brokered CDs.
On the asset side we suggest seasoned 15 or 10-year MBS with good yield and cashflow. But, ARMS are also a great choice. Below is one we recommend: FHLMC 5/1 Libor Arm, 2.54% Coupon, 2/2/6 Cap structure, with 59 months to weighted average reset, and it settles on 12/26.
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