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Tuesday, February 27, 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 |
| 2/20/18 | 1.39 | 1.66 | 1.87 | 2.01 | 2.25 | 2.40 | 2.65 | 2.81 | 2.88 | 3.04 | 3.15 |
| 2/21/18 | 1.40 | 1.64 | 1.85 | 2.03 | 2.26 | 2.44 | 2.69 | 2.86 | 2.94 | 3.11 | 3.22 |
| 2/22/18 | 1.34 | 1.63 | 1.84 | 2.02 | 2.25 | 2.42 | 2.66 | 2.84 | 2.92 | 3.08 | 3.21 |
| 2/23/18 | 1.38 | 1.64 | 1.85 | 2.02 | 2.25 | 2.39 | 2.62 | 2.79 | 2.88 | 3.04 | 3.16 |
| 2/26/18 | 1.39 | 1.66 | 1.87 | 2.03 | 2.22 | 2.37 | 2.60 | 2.77 | 2.86 | 3.03 | 3.15 |
Source: U.S. Department of the Treasury, as of 2/26/18
What Goes Up…Might Just Continue To Go Up, And Up, And Up!
We’re talking about bond yields here. To be specific, we are first talking about overnight Fed Funds, and secondly, the 10 year Treasury.
First, barring a catastrophic random event, the current data indicates the Fed is likely to raise overnight funds at least twice before year-end, and possibly even more. Let us assume three more changes for the purpose of this conversation. Twenty-five basis points over three meetings. This will put overnight funds at 2.25% by the end of the year. Let us also assume New York Prime moves along with overnight funds, putting Prime at 5.25% over the same period. The 10-year Treasury is bound to increase in yield with the enormous increase in debt to be sold. The tax cut, recent spending bill, and the existing debt must be funded. Will the 10 year be 3.25%, or much higher, by year-end? At this point, these changes in rates will likely make it difficult for most community banks to maintain their current spread and margin.
Even with the 125 basis point increase in overnight funds since December of 2016, most banks have been able to “lag” deposit rate increases, at least to the extent they have been able to marginally increase the rate received on loans. But, the dam is about to “break” for some banks that need to gather more deposits to fund continued loan demand. How do you attract new deposits without repricing your existing deposit base? In many markets, the competitive yield on new loans has not kept pace with the increase in prime. Competition for loans is wicked, with many competitors having little concern for eventual Interest Rate Risk (IRR).
Simply stated, it appears likely that many banks will be forced to increase their COF more quickly than they will be able to “adjust” the loan rates they receive.
We offer a few suggestions: On the deposit side, get out on the curve!! Try to at least move out into the three and four-year range, either with wholesale funding or by offering a “special” that hopefully will attract new money without attracting existing depositors. Keep in mind a brokered CD with a call option (you own the option) will allow you to cut-off the funding if rates decrease or if loan demand dwindles. Do not get carried away with “match funding”. Beware of the cost of a long term liability that can’t be prepaid without a significant penalty, if the funded asset prepays. Pay a bit more on the higher tiers in non-maturing deposit accounts to reward the larger depositors without paying up for the smaller ones.
On the asset side, stick to what makes sense for your bank. There seems to an unlimited number of loan “deals” asking for a low fixed rate (still seeing 4.25% to 4.50%) for “long” terms (10 years) with 20-year amortization. Think of the IRR associated with these deals, regardless of the credit.
We like ARMS, 10 to 15 year MBS that “CASHFLOW”. There is negligible credit risk associated with the purchase of an agency MBS and there is almost no administration cost. If rates continue upward, reinvest the cash flow at a higher rate and adjust your portfolio as the curve adjusts higher. Call us at AMG if we can help. (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