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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 |
| 08/17/22 | 2.22 | 2.68 | 3.15 | 3.27 | 3.28 | 3.27 | 3.04 | 2.99 | 2.89 | 3.37 | 3.15 |
| 08/18/22 | 2.23 | 2.71 | 3.12 | 3.24 | 3.22 | 3.23 | 3.02 | 2.97 | 2.88 | 3.35 | 3.14 |
| 08/19/22 | 2.23 | 2.74 | 3.16 | 3.26 | 3.25 | 3.28 | 3.11 | 3.06 | 2.98 | 3.44 | 3.22 |
| 08/22/22 | 2.27 | 2.82 | 3.23 | 3.32 | 3.32 | 3.36 | 3.17 | 3.12 | 3.03 | 3.48 | 3.24 |
| 08/23/22 | 2.28 | 2.80 | 3.21 | 3.29 | 3.29 | 3.35 | 3.18 | 3.14 | 3.05 | 3.49 | 3.26 |
Source: U.S. Department of the Treasury, as of 8/23/2022
The Regression Analysis Interpreted…
You’ve seen and read about the regression analysis we have posted in this space several times over the years. We have been tracking this for more than 30 years now.
Do you know what this means in terms of your balance sheet, and what to do at various parts of the rate cycle? We want to share with you our DECISION MATRIX, which gives a hint at the various balance sheet strategies appropriate for each part of the cycle, and will try to expand on these a little, especially given the volatility experienced in 2022.
First the current REGRESSION ANALYSIS:
Source: Bloomberg, LLC
Next, the DECISION MATRIX:
With liquidity beginning to once again tighten, the question that often comes up in ALCO meetings we attend is “what should we do with regard to deposit pricing”? At the top of the rate cycle, +2 StdDev, we recommend banks SHORTEN the liability structure of the bank. This means, matching the RATE not the TERM of the competition. For example, if a good customer comes to you and shares they are going to move their CD to a competitor offering a 25 month CD @ 3.00% , you should be willing to match the rate (3.00%) but for a much shorter period of time, say 6 or 7 months or any term less than 1 year. This allows you to retain the customer and relationship, without paying a premium rate for longer than necessary to do so. The idea is that if we are at the top of the rate cycle, as we are today, we would expect to be able to reprice that deposit lower at renewal.
What about loans? We have just come through the fastest, steepest rise in rates in a generation if not longer. There is naturally some hesitancy in putting on fixed rate loans out the curve, but if we want to be long in current rates for a period of time that is what we should be doing, especially if we can get a prepayment penalty that would lock out the repriceability of that loan for a period of time.
This same strategy applies to the investment portfolio. We are hesitant to add duration to our bond portfolios because of paper losses (in dollar terms, if not percentage) in our portfolios. But again we should consider adding investments and duration with minimal optionality in order to “build a bridge” over the predicted trough in rates. This strategy will add protection to our margin in the face of the next declining rate part of the cycle.
Whenever we present the Regression Analysis, we inevitably get questions as to whether these relationships will hold, because “this time is different”, and what if this time it is WRONG? Those are legitimate questions, so let’s address those.
If interest rates were just random numbers, then it would be right to assume that it might be different this time, but in fact ANY Normally Distributed dataset MUST adhere to the rules of statistics and “Mean Reversion”. A normally distributed dataset can be identified if the data falls within a Bell Curve. If it can be presented in a Bell curve, then it can also be determined to be Normally Distributed, and vice versa.
This Is the data set above presented as a bell curve:
Some would also argue that while it may work for a 10 year data set, it doesn’t work for other periods of time. But we can demonstrate that interest rates maintain their normal distribution over EVERY time frame (from 1 to 100 years), and would be happy to show you that if you have an interest.
The point here is to help you understand the right moves to make at various parts of the rate cycle, even if they seem “counter intuitive” to what you may have learned over the years. If you would like to have a further discussion on this topic, feel free to call any of us at AMG, or your Capital Markets Representative.
Enjoy your day.
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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