Friday, June 19, 2020 |
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| MANAGING DIRECTOR: Scott Carrithers PORTFOLIO SALES AND SERVICE: Steve Panknin • George Morris • Jeff Goble • Chris Thompson • Sean Doherty Kevin Doyle • Lonnie Harris • Mark Tranckino • Robert Schuyler • Tom Toburen • Josh Kiefer Nicole Burczyk • Natalie Regan • Aaron Stoffer • Chuck Honeywell |
| 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 |
| 06/12/20 | 0.14 | 0.16 | 0.18 | 0.18 | 0.19 | 0.22 | 0.33 | 0.54 | 0.71 | 1.24 | 1.45 |
| 06/15/20 | 0.15 | 0.18 | 0.19 | 0.17 | 0.19 | 0.22 | 0.33 | 0.54 | 0.71 | 1.24 | 1.45 |
| 06/16/20 | 0.14 | 0.17 | 0.19 | 0.18 | 0.21 | 0.22 | 0.34 | 0.56 | 0.75 | 1.31 | 1.54 |
| 06/17/20 | 0.13 | 0.17 | 0.18 | 0.19 | 0.19 | 0.23 | 0.34 | 0.55 | 0.74 | 1.30 | 1.52 |
| 06/18/20 | 0.13 | 0.16 | 0.17 | 0.19 | 0.19 | 0.22 | 0.34 | 0.54 | 0.71 | 1.24 | 1.47 |
Source: U.S. Department of the Treasury, as of 06/18/2020
Cutting Cost of Funds
The last few months have been tumultuous for everyone, including community banks. We anticipate that the Yield on Earning Assets (YEA) will continue to decline at least through the end of the year. The virus induced economic woes have forced a combination of temporary loan restructuring and, in many cases, permanent rate reductions. Unfortunately, there is not a lot a banker can do about these circumstances. One major caveat, be cautious when negotiating a “new” rate to retain a really good borrower. As tough as it may be, it is okay to walk away if the terms of the new agreement leave too much room for uncertainty (interest rate risk) down the road.
In response to a declining YEA, it is imperative to cut the Cost of Funds (COF). As loan demand has slowed almost all community banks have seen a surge in excess funds. A combination of PPP loans still sitting in Non-Interest Bearing DDAs and a flood of new deposits have almost overwhelmed some banks. There are “cheap” wholesale alternatives, but we recommend you not overpay depositors. The reason most consumers are increasing deposit balances has absolutely nothing to do with rate. No one knows exactly how “sticky” the increased balances are at this point, but it doesn’t matter.
The two key takeaways from these above paragraphs are simple:
First, very few can afford to park excess liquidity in Fed Funds Sold. As painful as it may seem to purchase a security yielding 1.00% (or less), it can be far more painful to receive 5 to 8 bps in Fed Funds sold.
Second, as pointed out in the previous PMRs this week, it is an excellent time to look at the current situation in the context of history and the “big picture”. Excess funds are always “cheap” when they cannot be profitably deployed. But, someday, the current cost of long-term wholesale funding will look like an opportunity lost. The cost of long-term Brokered CD’s with an option to call within 6 months or a year should be seriously considered.
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