Tuesday, March 19, 2019 |
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| MANAGING DIRECTOR: Scott Carrithers PORTFOLIO SALES AND SERVICE: Steve Panknin • George Morris • Jeff Goble • Chris Thompson • Sean Doherty Kevin Doyle • Lonnie Harris • Mark Tranckino • Robert Schuyler • Tom Toburen • Josh Kiefer Nicole Burczyk • Kelley Frye • Natalie Regan • Aaron Stoffer • Chuck Honeywell • Gus Koppen |
| 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 |
| 03/12/19 | 2.44 | 2.46 | 2.53 | 2.52 | 2.45 | 2.41 | 2.41 | 2.50 | 2.61 | 2.82 | 3.00 |
| 03/13/19 | 2.43 | 2.45 | 2.53 | 2.53 | 2.45 | 2.41 | 2.42 | 2.51 | 2.61 | 2.82 | 3.02 |
| 03/14/19 | 2.48 | 2.45 | 2.52 | 2.52 | 2.46 | 2.42 | 2.43 | 2.53 | 2.63 | 2.86 | 3.04 |
| 03/15/19 | 2.46 | 2.45 | 2.52 | 2.52 | 2.43 | 2.39 | 2.40 | 2.49 | 2.59 | 2.83 | 3.02 |
| 03/18/19 | 2.47 | 2.44 | 2.51 | 2.52 | 2.45 | 2.41 | 2.42 | 2.51 | 2.60 | 2.83 | 3.01 |
Source: U.S. Department of the Treasury, as of 03/18/2019
Markets in Transition; What to do Now? (Part 1)
Over the last 24 months, interest rates have certainly been in transition. 2 years ago, the 10 year Treasury was around 1.50%, today it is just over 2.55%. The 2 year Treasury over this same period increased from 0.50% to 2.45%. This is what we call a classic “Bear Flattening” scenario, the yield curve flattens as prices of securities declines (yields increase). This generally occurs due to a push by the Federal Reserve to increase short term interest rates in response to a perceived inflationary phenomenon, or as in this case, to restore the “real interest rate” to a more normalized level (and also because they had inflation fears as well). It looks something like this:
The fact is, we can’t find one instance where this has occurred. This is not to say that yield curves don’t steepen by long term rates moving higher (often they do), but they don’t go from a FLAT curve to a STEEP curve in this way. Long rates will often lead short rates higher when there is anticipation of tightening moves by the Fed in the face of obvious inflation indicators, but this generally occurs after a period of easy money policies and relatively low short term interest rates, not after tighter money policies have been in place and rates have responded accordingly.
So this leads us to the next logical question, What’s Next? If the Fed is true to form and markets react as they have in the past, the next scenario we are likely to experience is the “Bull Steepening” scenario. This will in effect steepen the curve through a series of easy money policies by the Fed designed to “stimulate” economic activity by pushing short term rates lower, once again. It looks like this:
If you wait for the Fed to act, however, you have already lost the game. As we have mentioned in this space before, the Fed FOLLOWS markets, it does not lead them (that is true in both rising and declining rate environments). We are humans, and as such we are creatures of habit, often to our detriment. We tend to believe that what has most recently occurred will continue (called the Recency Bias). So if loan demand is good (although at lower rates than we would like) we generally expect it to continue. If the 10Y Treasury was at 3.00%, we generally expect it will get back to that same level soon. If deposit costs have been doing nothing but going higher recently, we tend to expect it will continue and our behavior tends to reflect all of these things.
What if NONE of that happens? Stay tuned. Overcoming our tendencies is hard, and few will be able to pull it off, but we will hopefully give you a healthy perspective on all of these things this week in the PMR.
In the meantime, we sincerely appreciate your continued confidence in all of us here at Country Club Bank. Please don’t hesitate to call on us if we can assist you in any way.
Markets in Transition; What to do Now? (Part 1)
Over the last 24 months, interest rates have certainly been in transition. 2 years ago, the 10 year Treasury was around 1.50%, today it is just over 2.55%. The 2 year Treasury over this same period increased from 0.50% to 2.45%. This is what we call a classic “Bear Flattening” scenario, the yield curve flattens as prices of securities declines (yields increase). This generally occurs due to a push by the Federal Reserve to increase short term interest rates in response to a perceived inflationary phenomenon, or as in this case, to restore the “real interest rate” to a more normalized level (and also because they had inflation fears as well). It looks something like this:
Flat yield curves can tell us quite a bit about the market interpretation of what might happen next. For example, the fact that a long term investor demands the same relative return as a short tem investor indicates that the “market” does not believe inflation is a threat any longer. When this happens, there are always stories like the “market is wrong” or that this time is different. Many will argue that the yield curve will relieve itself of its flatness once inflation becomes apparent again and long term rates rise further. This is interesting, because that would mean that the yield curve would “Bear Steepen” in this way:
The fact is, we can’t find one instance where this has occurred. This is not to say that yield curves don’t steepen by long term rates moving higher (often they do), but they don’t go from a FLAT curve to a STEEP curve in this way. Long rates will often lead short rates higher when there is anticipation of tightening moves by the Fed in the face of obvious inflation indicators, but this generally occurs after a period of easy money policies and relatively low short term interest rates, not after tighter money policies have been in place and rates have responded accordingly.
So this leads us to the next logical question, What’s Next? If the Fed is true to form and markets react as they have in the past, the next scenario we are likely to experience is the “Bull Steepening” scenario. This will in effect steepen the curve through a series of easy money policies by the Fed designed to “stimulate” economic activity by pushing short term rates lower, once again. It looks like this:
If you wait for the Fed to act, however, you have already lost the game. As we have mentioned in this space before, the Fed FOLLOWS markets, it does not lead them (that is true in both rising and declining rate environments). We are humans, and as such we are creatures of habit, often to our detriment. We tend to believe that what has most recently occurred will continue (called the Recency Bias). So if loan demand is good (although at lower rates than we would like) we generally expect it to continue. If the 10Y Treasury was at 3.00%, we generally expect it will get back to that same level soon. If deposit costs have been doing nothing but going higher recently, we tend to expect it will continue and our behavior tends to reflect all of these things.
What if NONE of that happens? Stay tuned. Overcoming our tendencies is hard, and few will be able to pull it off, but we will hopefully give you a healthy perspective on all of these things this week in the PMR.
In the meantime, we sincerely appreciate your continued confidence in all of us here at Country Club Bank. Please don’t hesitate to call on us if we can assist you in any way.
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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