| Wednesday, June 29, 2022 | ||||||||
|---|---|---|---|---|---|---|---|---|
|
MANAGING DIRECTOR: |
||||||||
|
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 |
| 06/22/22 | 0.98 | 1.61 | 2.40 | 2.79 | 3.06 | 3.20 | 3.22 | 3.24 | 3.16 | 3.49 | 3.25 |
| 06/23/22 | 1.12 | 1.65 | 2.44 | 2.78 | 3.01 | 3.12 | 3.14 | 3.16 | 3.09 | 3.45 | 3.21 |
| 06/24/22 | 1.19 | 1.73 | 2.51 | 2.83. | 3.04 | 3.13 | 3.18 | 3.19 | 3.13 | 3.51 | 3.26 |
| 06/27/22 | 1.16 | 1.79 | 2.56 | 2.89 | 3.08 | 3.21 | 3.24 | 3.27 | 3.20 | 3.56 | 3.31 |
| 06/28/22 | 1.12 | 1.79 | 2.55 | 2.88 | 3.10 | 3.21 | 3.25 | 3.27 | 3.20 | 3.55 | 3.30 |
Source: U.S. Department of the Treasury, as of 6/28/2022
Income Strategy for a Recession
Most of us can agree that a recession appears to be looming. The first quarter of 2022 reported negative GDP and so far, in the second quarter of the year, economic numbers have been hinting at continual slowing of the economy. Last week, Fed Chair Jerome Powell mentioned that the Fed’s plan is to continue to hike the Fed Target rate, which could lead to a recession. Additionally, Mr. Powell mentioned that a soft landing would be “very challenging.”
You have heard the saying that credit cycles follow interest rate cycles. When interest rates fall, credit deteriorates. Additionally, losses in the loan portfolio often come from the loans originated at the top of the rate cycle. The previous “Covid-19” recession was very shallow and short-lived. The next recession may not be as painless, as hinted by the Fed.
The graph below from the St. Louis Fred Data system shows the shaded recession bands, the 5 year Treasury rate (in red), and the charge-off rate (in blue) on all loans for all commercial banks dating back to 1985. Additionally, the left axis represents the Treasury rate and the right axis represents the charge-off rate on loans. This chart shows us that the 5-year Treasury will peak before a recession and will not bottom until well after the recession is over. Additionally, the charge-off rate on loans does not peak until after the recession is over.
Loan charge-offs will have a direct negative impact on net income. Outside of not making bad loans, one of the best strategies to help offset the negative impact of loan charge-offs is to have plain vanilla, bullet-type investments purchased near the top of the rate cycle that will increase in value if rates fall. The gains in these assets will help offset potential losses on loans if the economy gets ugly. If you are fortunate and able to avoid loan losses, your gains can also be used to pair losses from other investments that were purchased when there were no other alternatives.
If you follow our regression analysis, you will see the signals of a probable top in interest rates as rates are currently at a plus two standard deviations above the mean, which indicates over a 96 percent probability that rates fall at some point.
If you follow our regression analysis, you will see the signals of a probable top in interest rates as rates are currently at a plus two standard deviations above the mean, which indicates over a 96 percent probability that rates fall at some point.
Now is the time to start planning for a rainy day as the clouds are starting to roll in. Reach out to your CCB representative to further the conversation.
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