| Wednesday, November 1, 2023 |
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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 |
| 10/25/23 | 5.39 | 5.47 | 5.56 | 5.44 | 5.12 | 4.98 | 4.92 | 4.98 | 4.96 | 5.29 | 5.09 |
| 10/26/23 | 5.39 | 5.46 | 5.54 | 5.41 | 5.04 | 4.88 | 4.80 | 4.87 | 4.85 | 5.19 | 4.99 |
| 10/27/23 | 5.39 | 5.45 | 5.53 | 5.41 | 5.00 | 4.84 | 4.76 | 4.84 | 4.84 | 5.21 | 5.02 |
| 10/30/23 | 5.40 | 5.46 | 5.55 | 5.43 | 5.06 | 4.90 | 4.82 | 4.90 | 4.90 | 5.24 | 5.05 |
| 10/31/23 | 5.40 | 5.47 | 5.57 | 5.46 | 5.06 | 4.90 | 4.81 | 4.88 | 4.88 | 5.22 | 5.02 |
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 10/31/2023.
While liquidity remains tight in some banks, with BTFP, FHLB and Brokered Deposits all at recent highs, others have been content with clipping 5.25% yields in an overnight Fed Funds Sold position. I am sorry to be the bearer of bad news, but neither of these strategies may be the most efficient use of your balance sheet. Why, you ask?
You might be ignoring the potential in your bond portfolio. I know, I know, we have all been burned at that stove and are reluctant to go near it again, but there are opportunities you should consider.
For example, the “Give-Up Yield” on the sale of securities is the equivalent of your borrowing cost. If you can sell a security with a give-up yield less than your borrowing costs then it is generally, the better (less expensive) option for you. We often don’t want to take the loss on the sale of the security because, quite frankly, it feels like failure. But the loss on the sale of a security is effectively the interest expense on the borrowing if you choose to go that route. With short-term borrowing costs near 5.50%, we believe it is an avenue that should be explored. Secondarily, the shift in the asset mix will not increase the balance sheet leverage thereby reducing your capital ratios.
As for those in overnight funds gathering up 5.25% returns, you may have fallen into the classic “bankers trap”. Inverted yield curves typically tempt us to stay short, when the reality of the message is to extend, primarily because yields will need to move significantly lower to “normalize” the curve (see graph below). There is rarely a case where there aren’t a number of opinions trying to convince us to take the wide road. “Stay short”, they say, “stay liquid”, they counsel, “You can’t get hurt grabbing 5.25%”. This advice is not wrong, it is only wrong if you NEVER change. If you ride this strategy back down the rate cycle, you will have missed an opportunity to insulate your earnings position through the next downturn. Remember, we need to prepare the balance sheet for the next cycle, not the last one.
This requires some nuance. Which is a 5-cent word for dollar cost averaging. We can’t know when the “top” (in yields) has been reached. So, we must employ a discipline in keeping active in the market with low cash flow, low optionality securities on a regular basis. This way we will have allowed our balance sheets to inch closer to current rates while the curve is inverted and shield these returns for the time when the curve normalizes.
OK, so how can a bond swap help? First, they can identify the give-up yields for comparison purposes. Secondly, they can quantify the tax advantage to taking a loss. Thirdly they can help management to understand the impact on the future earnings of the bank. Finally they can show you how a combination of loans and bonds can meet the twin goals of increasing market share and insulating earnings for the future downturn (which will come).
Ask us how we can help you and your management team to better understand the importance of these strategic decisions for your bank.
Thank you for your continued confidence in Country Club Bank.
You might be ignoring the potential in your bond portfolio. I know, I know, we have all been burned at that stove and are reluctant to go near it again, but there are opportunities you should consider.
For example, the “Give-Up Yield” on the sale of securities is the equivalent of your borrowing cost. If you can sell a security with a give-up yield less than your borrowing costs then it is generally, the better (less expensive) option for you. We often don’t want to take the loss on the sale of the security because, quite frankly, it feels like failure. But the loss on the sale of a security is effectively the interest expense on the borrowing if you choose to go that route. With short-term borrowing costs near 5.50%, we believe it is an avenue that should be explored. Secondarily, the shift in the asset mix will not increase the balance sheet leverage thereby reducing your capital ratios.
As for those in overnight funds gathering up 5.25% returns, you may have fallen into the classic “bankers trap”. Inverted yield curves typically tempt us to stay short, when the reality of the message is to extend, primarily because yields will need to move significantly lower to “normalize” the curve (see graph below). There is rarely a case where there aren’t a number of opinions trying to convince us to take the wide road. “Stay short”, they say, “stay liquid”, they counsel, “You can’t get hurt grabbing 5.25%”. This advice is not wrong, it is only wrong if you NEVER change. If you ride this strategy back down the rate cycle, you will have missed an opportunity to insulate your earnings position through the next downturn. Remember, we need to prepare the balance sheet for the next cycle, not the last one.
This requires some nuance. Which is a 5-cent word for dollar cost averaging. We can’t know when the “top” (in yields) has been reached. So, we must employ a discipline in keeping active in the market with low cash flow, low optionality securities on a regular basis. This way we will have allowed our balance sheets to inch closer to current rates while the curve is inverted and shield these returns for the time when the curve normalizes.
OK, so how can a bond swap help? First, they can identify the give-up yields for comparison purposes. Secondly, they can quantify the tax advantage to taking a loss. Thirdly they can help management to understand the impact on the future earnings of the bank. Finally they can show you how a combination of loans and bonds can meet the twin goals of increasing market share and insulating earnings for the future downturn (which will come).
Ask us how we can help you and your management team to better understand the importance of these strategic decisions for your bank.
Thank you for your continued confidence in Country Club Bank.
2Y Treasury in Green generally moves faster than the longer end of the curve (10Y Treasury in yellow), which is how the curve normalizes. If the Yield curve does normalize with longer term yields moving higher and steepening the curve, it will be the FIRST TIME ever.
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