Finding Value in Today's Volatile Markets By Brian Schaff   There are a variety of factors affecting bond markets today and this has caused stress and uncertainty for portfolio managers. A few key causes of recent volatility are the debt ceiling standoff, speculation on the Federal Reserve’s interest rate decisions in June and July, liquidation of large securities portfolios from bank failures and stubborn inflation requiring careful attention. This almost constant pushing and pulling of rates has created a murky environment and confusion on what to do next. Market dislocations can also create opportunities, so despite these circumstances there is value to be found. Depending on your interest rate bias, you can develop an investment strategy for your bank that takes advantage of what the market has presented. We’ve seen the yields on the short end of the Treasury curve spike dramatically, which has caused more severe inversion. However, municipal bond spread value remains greater further out on the curve. The current shape of the yield curve can be deceitful. As mentioned, the absolute highest nominal yields are all found within one year. When we begin to look further out, rates drop significantly. The obvious temptation is to capture the best annualized return on your money. However, locking in returns for a longer period of time mitigates reinvestment risk, which could evolve to be a major issue for banks in the next few years.     Any recession could have a significant negative impact on interest rates, not to mention the repercussions if and when the Federal Reserve decides to slash their benchmark rate. Before entering a falling rate environment, a scenario worth preparing for, there are a few beneficial strategies to consider in order to ensure the health of the balance sheet and portfolio:   Lengthen assets. Both the loan and investment portfolio benefit from a high rate environment and avoiding repricing for longer.   Shorten liabilities. Keep borrowings within investment duration. Borrowings that outlast loans and investments could prove to be expensive down the line.   Add fixed rate. Locking in loan and investment rates will perform best in the event that rates fall. Floating rate assets risk sinking lower with the market   Tighten credit standards. No one knows the immediate future direction of rates, but utilizing these strategies before the cycle turns can help the long term success of the bank. Just as the rapid rise in rates hurt market value of equity, declining rates work in the favor of held assets. Combining the best fixed income spreads out longer on the curve with the possibility of a recessionary decline in yields highlights the best value available today. Please contact your Country Club Bank representative with any questions or comments.

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