20 Hoosier Banker August 2014 At the end of last year, conventional wisdom called for a steady increase in interest rates and bond yields as we moved through 2014. After all, the economy had shown clear signs of improvement, job creation seemed to be proceeding apace, and the Fed had begun the process of winding down its “Quantitative Ease” (QE) stimulus program. In the midst of this year-end landscape, the 10-year Treasury yield was sitting slightly above 3 percent and seemed poised to drift higher. It is still possible that higher yields will be a reality by the end of 2014, but for now there is a good deal of head scratching about why we saw the 10-year yield drop sharply in the first half of the year. Supply and Demand Much of the explanation for the strong bond market can be found simply in the laws of supply and demand. After all, bonds are not unlike commodities in the sense that there is a finite supply available at any point in time, and a given level of demand at the same time. Yes, the Fed’s QE program was an important source of demand, and it has been steadily tapered away. But there is much more that is figuring into the supply/demand equation for bonds. Even with the Fed on course to end its QE bond purchases by October, there has also been a notable slowdown in net issuance of Treasurys, as the budget deficit has improved sharply. Indeed the annual budget deficit as a percent of gross domestic product is 30 percent narrower than one year ago, and it is now below the 30-year average. The upside of this situation for bonds is that net issuance of Treasury debt had declined 60 percent through the first six months of the year. Moreover, the dearth of supply is not limited to the United States. It is estimated that the worldwide supply of bonds may fall short of demand by as much as half a trillion. This imbalance has led to a ratcheting downward of rates and bond yields around the world. On the demand side, cash has been plowed into Treasurys for a variety of reasons, including the safe-haven trade. When geopolitical flashpoints DIRECTORS / SENIOR MANAGEMENT Mid-Year Thoughts on Interest Rates and the Bond Market The American Bankers Association (through its subsidiary, the Corporation for American Banking) has endorsed services provided by Equias Alliance. Todd Andritsch is a registered representative of and securities are offered through ProEquities, Inc., a Registered Broker/Dealer, and member FINRA and SIPC Equias Alliance LLC is independent of ProEquities, Inc. ©2014 Equias Alliance www.equiasalliance.com Todd Andritsch tandritsch@equiasalliance.com 11416 Forest Knoll Circle Fishers, IN 46037 Tel: 317-517-5000 Equias Alliance helps banks in Indiana, and across the country, meet their financial goals, manage benefit liabilities and enhance shareholder value with a custom designed BOLI program. Todd and the team at Equias Alliance want to be your source for strategic benefit and BOLI solutions. In Indiana, The Checkered Flag for BOLI is Todd Andritsch!
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