| Friday, July 29, 2022 | ||||||||
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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 |
| 07/22/22 | 2.15 | 2.49 | 2.97 | 3.01 | 2.98 | 2.93 | 2.87 | 2.85 | 2.77 | 3.23 | 3.00 |
| 07/25/22 | 2.14 | 2.62 | 3.06 | 3.07 | 3.00 | 2.98 | 2.89 | 2.89 | 2.81 | 3.28 | 3.04 |
| 07/26/22 | 2.17 | 2.55 | 3.01 | 3.06 | 3.02 | 3.01 | 2.89 | 2.88 | 2.81 | 3.27 | 3.03 |
| 07/27/22 | 2.14 | 2.44 | 2.93 | 3.00 | 2.96 | 2.93 | 2.82 | 2.83 | 2.78 | 3.26 | 3.03 |
| 07/28/22 | 2.20 | 2.42 | 2.90 | 2.93 | 2.85 | 2.81 | 2.69 | 2.69 | 2.68 | 3.23 | 3.02 |
Source: U.S. Department of the Treasury, as of 7/28/2022
Updated ALCO Observations
From time to time, we share our observations of AMG client banks. This Friday edition of our PMR is a brief summary of noted recent trends:
Yield on Earning Asset (YEA) have increased in almost all AMG banks
The FED’s rate hikes, the increase in PRIME and current treasury yields have combined to increase the YEA in almost every bank we work with. There are many variables of course, including the number of PRIME loans to reprice, re-investment of maturing securities and magnitude of overnight funds sold. Most banks have picked up at least 25 bps over the last quarter and many have increased YEA by 50 basis points (bps). Overall, most banks are in the 3.25% to 3.50%, which is substantially greater than just six months ago.
Spread and Net Interest Margin (NIM) have also increased, as Cost of Funds (COF) has lagged, so far
As YEA has increased, most banks have been able to “lag” an increase in COF. Many banks have marginally increased deposit expense, mainly as a show of “good faith”. Very few of the banks we work with have had a material decline in deposits, but it does appear a few are trending that way. Time deposits appear to be the most vulnerable, but most banks are only matching higher rates for truly good customers, not shoppers. We suggest holding the line (cost) on non-maturing deposits as long as possible, while watching the balance behavior.
Liquidity is starting to be a concern for some banks
Actually very few banks have liquidity issues, but the fear of deposit loss and the market value of the investment portfolio have some folks concerned. Yet, almost every bank easily “passes” the Severe Stress Event, and most can easily borrow or add brokered deposits to cover liquidity issues.
Investing behavior
It is a mixed bag, as some are taking advantage of current rates that are many times 100 to 300 bps greater than maturing securities or MBS cash flow. Others are taking the wait and see approach, if there are serious liquidity concerns. Beware of the “bankers trap”, which is the temptation to invest short (two years for example) because the current yield is greater than a ten-year rate. An inverted curve makes shorter rates tempting, but if there is a recession, and the treasury curve reverts to “normal”, the ten-year yield is likely to remain, while the two year might not. It may be emotionally difficult, but history says invest “out on the curve”, to maintain yield.
Please call AMG at 800.226.1923 if you would like to discuss these or any other ALCO issues.
Yield on Earning Asset (YEA) have increased in almost all AMG banks
The FED’s rate hikes, the increase in PRIME and current treasury yields have combined to increase the YEA in almost every bank we work with. There are many variables of course, including the number of PRIME loans to reprice, re-investment of maturing securities and magnitude of overnight funds sold. Most banks have picked up at least 25 bps over the last quarter and many have increased YEA by 50 basis points (bps). Overall, most banks are in the 3.25% to 3.50%, which is substantially greater than just six months ago.
Spread and Net Interest Margin (NIM) have also increased, as Cost of Funds (COF) has lagged, so far
As YEA has increased, most banks have been able to “lag” an increase in COF. Many banks have marginally increased deposit expense, mainly as a show of “good faith”. Very few of the banks we work with have had a material decline in deposits, but it does appear a few are trending that way. Time deposits appear to be the most vulnerable, but most banks are only matching higher rates for truly good customers, not shoppers. We suggest holding the line (cost) on non-maturing deposits as long as possible, while watching the balance behavior.
Liquidity is starting to be a concern for some banks
Actually very few banks have liquidity issues, but the fear of deposit loss and the market value of the investment portfolio have some folks concerned. Yet, almost every bank easily “passes” the Severe Stress Event, and most can easily borrow or add brokered deposits to cover liquidity issues.
Investing behavior
It is a mixed bag, as some are taking advantage of current rates that are many times 100 to 300 bps greater than maturing securities or MBS cash flow. Others are taking the wait and see approach, if there are serious liquidity concerns. Beware of the “bankers trap”, which is the temptation to invest short (two years for example) because the current yield is greater than a ten-year rate. An inverted curve makes shorter rates tempting, but if there is a recession, and the treasury curve reverts to “normal”, the ten-year yield is likely to remain, while the two year might not. It may be emotionally difficult, but history says invest “out on the curve”, to maintain yield.
Please call AMG at 800.226.1923 if you would like to discuss these or any other ALCO issues.
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