| Wednesday, June 26, 2024 |
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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 |
| 06/19/24 | 5.29 | 5.38 | 5.35 | 5.09 | 4.72 | 4.44 | 4.24 | 4.22 | 4.22 | 4.47 | 4.36 |
| 06/20/24 | 5.26 | 5.37 | 5.36 | 5.11 | 4.74 | 4.47 | 4.27 | 4.26 | 4.26 | 4.50 | 4.40 |
| 06/21/24 | 5.28 | 5.36 | 5.35 | 5.10 | 4.73 | 4.46 | 4.27 | 4.25 | 4.25 | 4.50 | 4.39 |
| 06/24/24 | 5.31 | 5.35 | 5.35 | 5.09 | 4.72 | 4.45 | 4.25 | 4.23 | 4.23 | 4.47 | 4.36 |
| 06/25/24 | 5.32 | 5.35 | 5.31 | 5.11 | 4.74 | 4.47 | 4.27 | 4.25 | 4.24 | 4.48 | 4.37 |
The data in the table above is static as of the time it was pulled, so rates may have changed. Treat all data in this table and PMR as indications only and availability is
always subject to change. This information was pulled manually from sources we believe to be reliable. New source, as of 12/12/2022, Bloomberg, L.L.P. As of: close
of business 06/25/2024.
How Conservative Is Your Balance Sheet?
Many of the bankers we speak with consider their style of balance sheet management to be conservative in nature. They have shared that by taking on too much risk generally leads to increased scrutiny from regulators and a need for more heartburn remedies. However, in an effort to balance the interest rate risk exposed by the Fed tightening 525 basis points in a short period of time, bankers appear to have inadvertently increased the risk on the balance sheet. When digging into the Uniform Bank Performance Report (UBPR) for peer group 5, commercial banks with assets between $300MM and $1B, we discovered some interesting data.
Since December 2022, loan growth has been 8.51 percent when measuring the change of loans as a percent of average assets. Over the same time, the growth of non-current loans has been 24.61 percent when calculating the change of non-current loans and leases to ACL on loans and leases. Additionally, available-for-sale securities shrunk 12.95 percent and ROAA shrunk 15.25 percent. So what does all this data tell us?
The changes in the balance sheet since December 2022 appear to tell us that credit risk has been increasing ultimately to counter the rising cost of funds in the banking industry. Additionally, current income has tightened, which may not be enough to offset a larger increase in credit loss. Furthermore, the securities portfolio, in general, hasn’t been added to during the increase in interest rates. This means bond gains may not be present even with a decrease in interest rates. The graph below from Bloomberg shows us the increasing economic risk from a credit risk perspective as well. This graph shows the spread between the 2 year Treasury and the 10 year Treasury compared to the Fed Funds effective rate and the recession bands going back almost 50 years. This chart simply shows us that an inverted yield curves becomes uninverted because of a Fed response to economic deterioration. Given we are currently in the longest inversion in history, the likelihood of the curve correcting seems to be getting closer by the day.
Source: Bloomberg 6.25.2024
The market expectation is that the Fed will cut before year-end. Additionally, many of the Fed members believe a rate cut could happen before year-end.
Source: Bloomberg 6.25.2024
Regardless of the timing of when the Fed ultimately pulls the trigger on cutting rates, we believe being prudent with your balance sheet is a must. While it may be difficult to execute, peeling off funds to increase the loan reserve and layering in a few high-quality securities that could appreciate in value and maintain liquidity in a troubled market could help protect the balance sheet. We know as conservative bankers that we need to assess our risk and adjust accordingly when it becomes out of balance. Take the trends in our balance sheets and weaknesses showing up in the economy as a warning indicator to begin considering making adjustments to your banks strategy.
Please reach out to your CCB representative to discuss your balance sheet, or options to start considering some re-allocation.
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