Independent Banker - January 2020 - 31

Next: What does 2020 have in store for compliance?
From a yield-curve-shift
perspective, 2019 was the
year of the unicorn. The net
effect on your bond portfolio
was positive.
The average difference was 14 basis points (0.14%), which
isn't insignificant to either investors or yield-curve watchers.
Market analysts consider such a condition to be a pretty
accurate predictor of near-future recessions.
There are two related events that probably hold more
meaning for community banks. The first is the inversion of
the points of the yield curve that have more predictive value,
those being the " two-to-tens. " That part was upside-down
for exactly five days, from Aug. 26-30, 2019. It's not exactly
what we would refer to as follow-through. The second is
the very visible steepening of the curve late in 2019, which
resulted in a more normal slope.
Rarely viewed
For purposes of this column, " more normal " refers to what
existed at the start of 2019. It was, and is, flat on a historical
basis. There is, in fact, an anticipated slowdown in the
economy that is represented in the current term structure of
interest rates. It also appears that there is virtually no inflation
risk premium at any point in the yield curve. For maturities of
less than 10 years, real interest rates are negative.
Still, between January and December 2019, the curve
experienced a Halley's Comet-like sighting: a parallel shift.
All maturities between one month and 10 years fell about 85
basis points, which makes sense when compared to the drop
in fed funds of 75 basis points. The secret ingredient for the
parallel shift is the near-total lack of fear regarding inflation.
During 2019, the 10-year " breakeven rate, " as quantified by
Treasury Inflation Protected Securities (TIPS), averaged
about 1.75% and never breached the 2% level, which has
been pursued by the Fed for some time without success.
Normally, during an easing phase, some amounts of inflation
risk premia work their way into yields, especially out
past five years. Not this time, at least not yet.
Now the good news
Let's first remind ourselves that while the treasury curve
is the subject of all manner of analysis, community banks
Education on Tap
2020 webinar series
ICBA Securities and its exclusive broker Vining
Sparks will again offer the multipart webinar series
Community Banking Matters next year. A variety of
topics that address balance sheet strategies and
risk management will be offered. We will again offer
CPE to the participants. Visit icbasecurities.com or
look back at this column for details.
don't own many treasuries. The yield curves of the bond
sectors that you do own have had positive slopes during the
timeframes we're discussing. That presents the opportunity
for your investments to hold their value very well, if we are
in a stable rate environment in 2020, as some economists
have suggested.
As rates have fallen evenly across the maturity spectrum,
anything that your community
bank has owned during that
period has appreciated in value.
Sometimes, if the curve flattens
or steepens enough, bonds with
certain average lives can be left
in the dust.
Check out this
early year
Something else that boosted
bond prices during 2019 was
a general narrowing of yield
spreads on the types of investments,
which community banks
own. (An exception was the
mortgage sector.) By the end
of the year, unrealized gains
were plentiful.
From a yield-curve-shift perspective,
2019 was the year of the
unicorn. The net effect on your
bond portfolio was positive. Since
portfolio management can be a
zero-sum game proposition, if the
economy runs sideways this year,
economic update
Craig Dismuke, the
chief economist of
Vining Sparks, will
present the 2020
Economic Outlook
webinar on Jan. 9
at 10 a.m. CDT. Visit
viningsparks.com
to register for the
webinar. This is the
first of the quarterly
events in the
2020 series.
and the curve maintains roughly its current shape, but yield
spreads widen back out to their 2018 levels, your investments
could lose some ground. That, of course, means your next
purchases will be at higher yields. These are the vagaries of
the bond market.
independentbanker.org Q 31
http://www.icbasecurities.com http://www.viningsparks.com http://www.independentbanker.org
Independent Banker - January 2020

Table of Contents for the Digital Edition of Independent Banker - January 2020
