Recent economic data suggest that the U.S. and global economies are growing, yet inflation is modest. Federal Reserve Chairwoman Janet Yellen has, in turn, signaled that the Fed will be cautious in liquidating its $4.5 trillion holdings of long-term securities. Not surprisingly, market participants are unsure as to what the future path of interest rates will be. While the Fed recently raised its target for the federal funds rate to 1% – 1.25%, long-term rates have declined relatively such that the yield curve has flattened. For example, the 10 year – 2 year yield spread on U.S. Treasury securities fell to 0.98% on July 12, from a high of almost 2.7% as recently as 2014.
Changing interest rates can potentially alter bank profitability in many different ways. Rising rates will increase funding costs as wholesale funds become more expensive, and eventually, rates on core deposits will rise to stem an outflow of funds. Rising rates will similarly lower market values of fixed-rate bond holdings with the impact much greater for longer-term securities. However, in this environment banks can adjust their portfolios by identifying securities that have the appropriate return and risk features given their overall interest rate risk profile.
This coming September 6-8, GSBC will be offering its 12th Annual Workshop on Community Bank Investments & Asset Liability Management in Las Vegas, NV. The majority of sessions will focus on the risk and return features of specific investment instruments, including agencies, mortgage-backed securities and municipals, and offer strategies to improve performance. Other sessions will examine deposit analytics, funding alternatives, merger and acquisition trends, plus offer an economic outlook. The focus is on opportunities for community banks to improve profitability and their overall risk management practices.
For more information on the workshop, click here.
by Timothy Koch, Ph.D., President