What a difference a few months make. In October 2018, the 10-year Treasury rate hit 3.25% and many market participants anticipated two more Federal Reserve rate hikes. The Treasury yield curve was modestly upsloping with longer-term rates above short-term rates. In recent days, the 10-year rate has fallen as low as 2.4% and the yield curve has inverted to where the 10-year rate is slightly below the 3-month Treasury rate.

Historically, an inverted yield curve has signaled that a recession is coming. This belief is consistent with recent data suggesting an economic slowdown, such as declines in purchasing managers indexes, declining sales of high-priced homes, and low inflation expectations. The Federal Reserve has correspondingly signaled that it will likely not raise the federal funds target rate in the near-term. If the U.S. economy is headed toward recession, how should community banks respond?

GSBC is offering the Community Bank Investment School (CBIS) this May that will address specific portfolio strategies that community banks might pursue in response to the volatile U.S. economy. Participants will work with community bankers who manage their banks’ investment portfolios (portfolio advisers) to examine specific securities and balance sheet strategies that best fit their banks’ risk and return objectives. Issues to be addressed include:

  • How changes in the level of interest rates and the shape of the yield curve affect portfolio returns
  • How the slowdown in sales of high-priced homes affects the jumbo mortgage market and what this means for mortgage-backed securities (MSBs) based on jumbos
  • How agency securities will likely be affected by changes in Fannie and Freddie efforts to reduce risk in their guarantee programs
  • How commercial MBSs will respond if the economy slows
  • How the municipal market will respond to changing economic conditions and the persistent pension problems in Illinois, New York, California, etc.

CBIS is a redesigned extension of a program I managed successfully at the University of South Carolina for more than 20 years, the Graduate School of Bank Investments and Financial Management. Now under the GSBC umbrella, CBIS is held at the University of Colorado Denver Business School where students have access to a state-of-the-art trading room and live instruction on their bank’s specific securities holdings. As part of small groups, each participant will examine the risk and return characteristics of different securities via Bloomberg terminals under the guidance of the community bank portfolio advisers.

Like all GSBC programs, CBIS was designed with a community bank’s best interests in mind. Only here will your employees have access to strategies independent from any one specific brokerage firm or investment model.

Seats are still available for the upcoming CBIS session, to be hosted May 19-23, 2019. Visit the program page for more information and a schedule, or contact the GSBC office at 800.272.5138.

by Timothy Koch, Ph.D., President