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Friday, July 20, 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 |
| 7/13/18 | 1.87 | 1.98 | 2.16 | 2.37 | 2.59 | 2.66 | 2.73 | 2.80 | 2.83 | 2.87 | 2.94 |
| 7/16/18 | 1.90 | 2.01 | 2.19 | 2.39 | 2.59 | 2.67 | 2.75 | 2.82 | 2.85 | 2.90 | 2.96 |
| 7/17/18 | 1.93 | 2.02 | 2.19 | 2.39 | 2.62 | 2.69 | 2.76 | 2.83 | 2.86 | 2.91 | 2.97 |
| 7/18/18 | 1.90 | 2.00 | 2.17 | 2.43 | 2.60 | 2.69 | 2.77 | 2.84 | 2.88 | 2.93 | 2.99 |
| 7/19/18 | 1.89 | 2.00 | 2.16 | 2.40 | 2.60 | 2.67 | 2.74 | 2.81 | 2.84 | 2.90 | 2.96 |
Source: U.S. Department of the Treasury, as of 07/19/2018
Trapped With High Cost Funds & Slower Loan Growth
Nine years into the current economic expansion and several good years of strong loan growth, it is easy to become complacent and overconfident with anticipated future loan growth and the need to raise additional funding. We are seeing a lot of parallel’s to the 2006-2008 timeframe in the US banking sector as banks continue to be met with funding pressure to meet new loan demand. In order to fund the loan demand, many community banks are taking on longer term funding (FHLB advances / non-callable CDs / etc.).
Nine years into the current economic expansion and several good years of strong loan growth, it is easy to become complacent and overconfident with anticipated future loan growth and the need to raise additional funding. We are seeing a lot of parallel’s to the 2006-2008 timeframe in the US banking sector as banks continue to be met with funding pressure to meet new loan demand. In order to fund the loan demand, many community banks are taking on longer term funding (FHLB advances / non-callable CDs / etc.).
Source: Bloomberg, FNE, CCB
Is it good timing now to take on fixed rate non-callable funding options at this point in the cycle? Per call report data, we are witnessing loan growth beginning to slow for banks in peer group 2 ($10-$100bln). Is this the top of the cycle or a precursor for slower loan growth for all banks? We could make the argument that we might be closer to the top than the bottom. We would strongly urge clients looking for longer term funding, greater than 3years, to look at callable CDs. Callable CDs offer flexibility in the event loan demand does not materialize or rates fall and loans refinance.
Source: Bloomberg, FNE, CCB
In 2006, yields on 5yr US Treasuries were over 5%, yet they fell to under 2.5% in less than 2yrs! Rates can move quickly when the economy turns and you do not want to be stuck with high cost of funds and declining loan growth. While the times are good and you can make strong quality loans, we believe longer-term callable CDs are worth evaluating if funding is tight at this point in the economic cycle. If the economy turns and your loan refinances (or pays off) you can call your CD and avoid being stuck with a high cost of funds. What if rates decline sharply and your loan remains on the book? Simply call your CD and reissue it at a lower rate while expanding your margin. We believe this is a great opportunity for a bank as funding appears not to be keeping pace with loan demand.
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