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Thursday, June 28, 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 |
| 6/21/18 | 1.85 | 1.94 | 2.12 | 2.34 | 2.56 | 2.65 | 2.77 | 2.86 | 2.90 | 2.97 | 3.04 |
| 6/22/18 | 1.83 | 1.93 | 2.11 | 2.33 | 2.56 | 2.65 | 2.77 | 2.86 | 2.90 | 2.97 | 3.04 |
| 6/25/18 | 1.80 | 1.93 | 2.13 | 2.34 | 2.54 | 2.63 | 2.75 | 2.83 | 2.87 | 2.95 | 3.02 |
| 6/26/18 | 1.79 | 1.93 | 2.14 | 2.33 | 2.53 | 2.63 | 2.75 | 2.84 | 2.88 | 2.95 | 3.03 |
| 6/27/18 | 1.79 | 1.93 | 2.10 | 2.33 | 2.52 | 2.59 | 2.71 | 2.79 | 2.83 | 2.90 | 2.97 |
Source: U.S. Department of the Treasury, as of 06/27/2018
Addressing Liquidity Issues
Liquidity remains a hot topic with many community banks, most of which have seen their Cost of Funds (COF) drift upward, as they’ve employed more costly, deposit-gathering strategies to fund expansion of their loan portfolios. Most banks with Loan to Deposit (L/D) ratios in excess of 95% have liquidated some portion of their investment portfolio, but somewhat surprisingly, not all have. Also surprisingly, many banks in the 80% to 85% L/D range (and headed higher) have not reduced their portfolio holdings.
Maintaining the investment portfolio is often related to pledging considerations for public funds or, in some cases, securing FHLB borrowings. As we have mentioned before, public funds, at least historically, have been a viable source of funding. But, in the last twenty years or so more and more “whole sale” options have become available that do not require pledging. Some public money is still “cheap”, but by and large, we are seeing a steep rise in the cost of these deposits, and again, pledging is required. Undoing community “relationships” is difficult, and many times not politically acceptable, which is understandable. But, if the only relationship to these deposits is “rate”, think about the added expense (pledging) related to these deposits. Likewise, pledging securities for FHLB borrowing is questionable because in most cases vetted loans are acceptable. Yet, some bankers find the loan pledging process is too “difficult” or too much trouble, so securities are used. This decision diminishes the liquidity ratio by reducing the number of marketable securities on the balance sheet.
In the bigger picture, keep in mind the expense and spread related to maintain the current portfolio. It is not uncommon to see a bank with an 85% L/D ratio that is borrowing wholesale to “fund” new loans but while maintaining the investment portfolio. It almost looks like borrowing to maintain the Investment portfolio. We understand this is not really “matched funding” to support the investment portfolio, but it does, in an isolated sense, look like it. Borrowing at 2% to fund an investment portfolio that is yielding 2.5% (with current purchases north of 3%) is a viable strategy if you cannot or do not want to fund loans at 5%. But, if the COF is 75 bps and rising, and the spread to the portfolio is 1.75%, while the spread to the loan portfolio 3.25%, what is the best strategy? It depends on whether or not new loan funding is the real game plan.
If selling securities is an option, portfolio managers may want to check the bids for BQ municipal bonds five years and in, as there seems to be more demand than supply. There’s also a strong bid for short WAM mortgage pools with 4% coupons.
In summary, selling securities may be the best option and least expensive strategy to fund current loans. Please let us know if you’d like us to review your portfolio to identify good candidates for liquidation.
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