Investing During Inversion By Brian Schaff   For the better part of the past year, important economic realities have presented themselves, like it or not. An inverted yield curve and high levels of inflation coupled with interest rate hikes paint a bleak picture regarding future direction of the economy. Maybe you prefer to see two consecutive negative quarters of GDP growth as your gauge for a recession. Sound familiar? The writing appears to be on the wall, but if you still aren’t convinced, we have an entirely different strategy in evaluating potential future rate movements. Regression analysis helps our bank form a future rate bias based on a historical lookback. The data comes from Treasury yields and allows us to understand how likely it is that rates move towards their average using statistical probabilities. As you can see below, according to the most recent 10 year data set on the 10 year Treasury, we are at +2 standard deviations. This gives the 10 year Treasury rate a 96.4% chance of reversion to the mean. Put differently, we’re at a point in the interest rate cycle where we can reasonably anticipate that rates can move lower over the long term.     Upon forming a rate bias, look toward the decision matrix next as a “cheat sheet” of sorts. For a +2 standard deviation environment, everything listed in the red box below checks out: with an inverted yield curve present, shorten liabilities and extend assets.     Entering the current outlook with properly reasoned expectations and the tools to execute a correlated strategy helps things seem a little less bleak. Below are a few of ideas to keep in mind when navigating these markets: Limit issuer optionality High coupon municipal bonds have a higher chance of getting called- extend with a longer call dates to keep current book yields in your portfolio for as long as possible Look for Agency bonds with sturdy initial lockouts and less frequent calls thereafter- onetime or annual if possible Find the outer range of your duration comfort zone and start there- this will look different for every bank It can be difficult to resist the highest yields on the curve, but keep in mind what this yield curve is telling you. Defaulting to purchasing short securities at a time when the road ahead seems uncertain risks repricing the portfolio at much lower yields. Please contact your Country Club Bank representative if you have any questions, or for help putting together a fixed income portfolio plan that works for you.               Source: Bloomberg, LLP

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