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Wednesday, December 13, 2017

MANAGING DIRECTOR:
Scott Carrithers
 
PORTFOLIO SALES AND SERVICE:
Steve Panknin • George Morris • Jeff Goble • Chris Thompson • Sean Doherty
Robert Brickson • Kevin Doyle • Lonnie Harris •  Mark Tranckino • Robert Schuyler 
Tom Toburen • Josh Kiefer • Nicole Burczyk • Kelley Frye • Natalie Regan • Aaron Stoffer • Chuck Honeywell

US Treasury Market
Date 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr
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
12/12/17 1.26 1.34 1.70 1.83 1.95 2.18 2.18 2.32 2.40 2.60 2.79

                                                                                       Source: U.S. Department of the Treasury, as of 12/12/17  

Reaction to Latest Fed Rate Hike?  Resist Inflating Your COF!

First of all, most deposits are not tied directly to the Fed’s overnight target rate.  If your bank does happen to have deposits indexed to Fed Funds we recommend you reconsider this strategy, it is costly, and uncontrollable!

Keep in mind, this is the 5th rate hike since December of 2015 and the COF (Cost of Funds) of most community banks has not dramatically increased, at least as a result of these increases.  It has “crept” up a bit in the more competitive markets with high loan demand, but that increase is likely due to competition, not the change in overnight target rate.  If you have sufficient liquidity to fund your current pipeline and your deposit balances are stable, our recommendation is that no change is made.

Interestingly, at least to us, is the “false start” we have seen many banks make as they have “half-heartedly” attempted to get out in front of their perception of increasing cost.  Almost all have put on the brakes as soon as they realizied that their offering rates were not high enough to either attract new depositors or force competitors to raise rates.  But, all this being said, if you are, or might be borrowing overnight, it might be a good time “lock-in” rates by utilizing wholesale funding, if your balance sheet will allow it.

As we mentioned yesterday, two (2.05%) or three year (2.15%) brokered CD’s may be a great way to protect overnight borrowing cost from zooming up if the FED raises three or four times in 2018.  Blocks of CD’s (or FHLB term borrowings) are likely to be far less expensive in the long run than rate sensitive overnight borrowings or the expensive proposition of raising more retail deposits, and the explosive “marginal cost” of each dollar raised.  The length of wholesale funding is a “rate” call of  course, but if you decide on a five year brokered CD at around 2.50% with a call option, you might be able to weather the near term storm and “call” the CD if rates fall three or four years from now.

The yield curve continues to flatten with about a 52 basis point spread between the two and ten year treasuries.  This is the “flattest” the yield curve has been about 10 years, and if the flattening continues, we could be headed for the “bankers trap”!  Simply put, if short term security yields (two year) are higher or the same as longer term (ten year) banker’s may fall into the “trap” of buying the shorter maturity because of less “risk”.  History tells us short term rates are likely to begin to falling while the longer term rates remain the same.  So, think about shape of the yield curve when managing the investment portfolio, and don’t get “trapped” on the short end of the curve.

In summary, we recommend not raising rates paid on interest bearing deposits at this point unless you have no other option.  If the balance sheet will allow, consider wholesale funding to extend out on the curve and avoid rate sensitive overnight borrowings.  A Fed rate hike is important, but it should not create a knee-jerk reaction that raises deposit rates.



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