Thursday, December 14, 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 |
| 12/06/17 | 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 |
| 12/13/17 | 1.22 | 1.30 | 1.47 | 1.68 | 1.79 | 1.90 | 2.12 | 2.26 | 2.36 | 2.56 | 2.74 |
Source: U.S. Department of the Treasury, as of 12/13/17
Fed Raises Overnight Funds Target; how does this effect your game plan?
The move to increase the overnight funds target by 25 basis points to 1.50% yesterday was “old news” before it happened. Plus, the newly released December “DOTS” (the 16 DOTS are economic projections representing each District and voting Directors) indicate three additional moves in 2018 and two additional moves in 2019. IF correct, Overnight Funds will be 2.75% as of 12/31/2019. The DOTS have not always been predictive because they are projections (that do not necessarily represent the voting members), but they have to be taken seriously. Consider that if PRIME moves in response to each Fed move it will be 5.75% by the end of 2019!
So, in response to the Fed’s behavior, and potential rate hikes going forward, what are a few basic strategies that might benefit community bankers going forward?
First, in terms of managing interest expense, try not to rush to increase rates paid on interest bearing deposits, at least across the board. In fact, initially, we recommend you do nothing. Be patient. Many banks have not raised rates at all since the initial Fed hike in December of 2015 (25 basis points to 50 basis points) and again resisted increases after the fourth raise in June of 2017. Some banks, in highly competitive markets with expanding loan demand have not been so lucky. So, do what you have to do in your market, but do not be the leader, and react in incremental, measured rate increases.
If you are beginning to experience a real liquidity crisis, we recommend you focus on “strategic” specials that will not blindly reprice a broad spectrum of depositors. And, be creative. If 10 million dollars are needed, what about a “niche” Money Market account that requires large balances and pays 1.25%, rather than a new CD maturity that pays 1.75%? There are no guarantees but many of the new, large balance MM accounts are most likely very sticky. At least that is what we have seen.
Beyond any short term considerations, is it time to step out on the curve by issuing brokered CD’s, or to take down longer term FHLB advances. If your balance sheet allows it, consider issuing brokered CD’s in the five year range with a call option. Though it will increase your cost of funding today, you are buying insurance to maintain your spread and margin down the road. With owning call protection, you have the option to take the funding off the table if higher rates fail to materialize. We believe the call is well worth the slight increase in cost at origination.
Let us know if we can help. Call AMG at 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.
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