Wednesday, August 30, 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 |
| 08/23/23 | 5.37 | 5.45 | 5.50 | 5.36 | 4.97 | 4.65 | 4.37 | 4.30 | 4.19 | 4.48 | 4.27 |
| 08/24/23 | 5.38 | 5.46 | 5.52 | 5.40 | 5.02 | 4.70 | 4.41 | 4.35 | 4.23 | 4.50 | 4.30 |
| 08/25/23 | 5.38 | 5.48 | 5.56 | 5.45 | 5.08 | 4.74 | 4.44 | 4.37 | 4.24 | 4.50 | 4.29 |
| 08/28/23 | 5.40 | 5.50 | 5.57 | 5.46 | 5.05 | 4.70 | 4.40 | 4.33 | 4.21 | 4.48 | 4.28 |
| 08/29/23 | 5.38 | 5.45 | 5.54 | 5.39 | 4.90 | 4.58 | 4.28 | 4.23 | 4.12 | 4.42 | 4.23 |
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 8/29/2023
Decisions Make a Difference
We all make decisions every day. What to wear. What to eat. How we go about our day. The decision to make no decision is by default a decision. Chairman Jerome Powell has a decision to make at the next Fed meeting. Does he raise rates or does he leave rates unchanged? Does this decision have a significant impact on what the Board of Governors, or the market, thinks about where rates are headed over the next couple of years? The World Interest Rate Probability (WIRP) function in Bloomberg indicates that rates are expected to be coming down within the next twelve months.
Additionally, the FOMC Dot Plot from June 2023 shows the committee believes that rates are headed lower over the next couple of years.
So, what is the point of this, you ask?
Well, the decisions you make from here will have a lasting impact on your balance sheet and earnings potential over the next several years.
Many banks we speak with have investments on the balance sheet that have a couple years left until maturity with below ideal yields. If you decide to let those ride until maturity, you are making the decision to reinvest those dollars at whatever the market provides at that time. If all the predictors are correct in the direction of rates, then the likelihood is that yields will be lower than they are today. Some simple math will help us see the lost opportunity.
Let’s assume you have $10 million maturing in 2 years that is currently yielding 1.50 percent. This will generate $300,000 of interest income to maturity. If we assume that we reinvest these dollars for 2 years at the prevailing market rate at the time (assumption time) let’s say 3.50 percent, then that will generate an additional $700,000 for a total of $1MM of interest income over a 4 year period. If you decide to go a different route and prefund that maturity by selling and recognizing a loss and reinvesting in a longer-term holding, you can stabilize your income at a higher level. If you are able to pick up 5.50% that will be there through that 4 year period, you would generate $2.2MM of interest income over that same time. Even when accounting for the loss on sale (approximately $800,000 not tax adjusted), the benefit is still evident.
Of course, there are several factors to consider when deciding to make this decision and they should be weighed. However, putting our heads down and doing nothing is still a decision we make even when considering the evidence of probable outcomes.
If you have questions for me, feel free to email me at astoffer@countryclubbank.com, or call us at 800.288.5489.
Well, the decisions you make from here will have a lasting impact on your balance sheet and earnings potential over the next several years.
Many banks we speak with have investments on the balance sheet that have a couple years left until maturity with below ideal yields. If you decide to let those ride until maturity, you are making the decision to reinvest those dollars at whatever the market provides at that time. If all the predictors are correct in the direction of rates, then the likelihood is that yields will be lower than they are today. Some simple math will help us see the lost opportunity.
Let’s assume you have $10 million maturing in 2 years that is currently yielding 1.50 percent. This will generate $300,000 of interest income to maturity. If we assume that we reinvest these dollars for 2 years at the prevailing market rate at the time (assumption time) let’s say 3.50 percent, then that will generate an additional $700,000 for a total of $1MM of interest income over a 4 year period. If you decide to go a different route and prefund that maturity by selling and recognizing a loss and reinvesting in a longer-term holding, you can stabilize your income at a higher level. If you are able to pick up 5.50% that will be there through that 4 year period, you would generate $2.2MM of interest income over that same time. Even when accounting for the loss on sale (approximately $800,000 not tax adjusted), the benefit is still evident.
Of course, there are several factors to consider when deciding to make this decision and they should be weighed. However, putting our heads down and doing nothing is still a decision we make even when considering the evidence of probable outcomes.
If you have questions for me, feel free to email me at astoffer@countryclubbank.com, or call us at 800.288.5489.
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.
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