21 Hoosier Banker August 2014 like Ukraine and Iraq pop up, money flows to the safest and most liquid markets. Despite all of the problems and challenges for the United States, its Treasury debt remains the best place for scared money to take cover. Fed Policy:The Expectations Game In addition to favorable supply/ demand dynamics, bond yields have been held lower by expectations that when the Fed finally begins to raise the Fed Funds rate, it will be a kinder, gentler tightening cycle. Specifically the futures market is projecting a gradual upward trajectory for the funds rate that will terminate at a relatively low level when all is said and done. In fact, futures pricing points toward a funds rate that is not much higher than 2 percent, even three years from now. This is the market’s reflection of Janet Yellen’s assessment that the Fed’s commitment to a “highly accommodative” monetary policy will still be necessary for some time to come. Given these market conditions, what should bank portfolio managers be doing? The first rule is to avoid complacency and to stay on task with prudent deployment of excess liquidity. If we consistently maintain a disciplined strategy to put idle funds to work at prevailing yields, we will hit the peaks and the valleys and everything in-between. This will result in a smooth moving average of portfolio yield and performance. Second, to the extent that the relatively strong bond market is a pleasant surprise, take advantage of it to restructure the portfolio for lower price risk, optimal cash flow or better relative value. Finally, remember to manage the bond portfolio within the context of the overall asset/liability posture of the bank. This is the cornerstone of good investment management throughout all interest-rate cycles. t About the Author Jeffrey F. Caughron is associate partner with The Baker Group, Oklahoma City, and works as a market analyst and portfolio strategist. He has worked in financial markets and the securities industry for more than 20 years. Caughron’s trading experience includes several years on the Treasury desk for an international bank on Wall Street and subsequent positions trading mortgage-backed securities and other taxable fixed-income products for regional broker/dealers. Additionally he managed a $600 million investment portfolio for a large regional financial institution. Caughron has published numerous articles on risk management topics and frequently is quoted in the financial press. He serves on the faculty of the Midwest School for Community Bankers and the Bank Operations Institute. The author can be reached at 800-937-2257, email: jcaughron@gobaker.com. The Baker Group is a Diamond Associate Member of the Indiana Bankers Association and an IBA Preferred Service Provider. Nick M. Skinner, president of Farmers and Mechanics Federal Savings and Loan, Bloomfield, has retired after over 40 years of service. He is a member of the Indiana Bankers Association Forty Year Club. William R. Ritzmann, president of United Community Bank, Lawrenceburg, has retired after 40 years in banking. He helped to create the bank in 1999 and will continue to serve on its board of directors and as a consultant. Ritzmann is a member of the Indiana Bankers Association Forty Year Club. t Taking iT Easy
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