Using the S&P 500 as a benchmark, the calendar month of October produced net advances in 20 months, and next retreats in only five. That is an arithmetical landslide. DIRECT IMPACT Let’s turn our attention now to what is of more import to your community bank: interest rates. Again using the last quarter century as our window, what did short- and long-term rates do in October? These results may surprise you, too. First, we’ll look at Federal Open Market Committee activity. As we know, the FOMC directly controls overnight rates, and on occasion — like most of the past 16 years — has influenced longer tenors through its intervention in the open market. Since 1998, it has not raised the target rate of fed funds in October. Conversely, it has cut rates five times (in 1998, 2001, 2007, 2008 and 2019). This may seem disingenuous to Fed watchers for a couple of reasons. First, interest rates have had a secular trend toward lower levels in the last quarter century, the past three years notwithstanding. Secondly, in many years, there isn’t an FOMC meeting in October, depending on how the calendar falls. Still, it’s a bit of a statistical outlier that there has been not a single October rate hike in the past 25 years. FARTHER OUT THERE This last point is especially driven home when we look at the yield history of the 10-year treasury note. The 10-year has an outsized influence on economic activity in the U.S. because of its correlation to 30-year mortgage rates. Unlike fed funds, the 10-year note has had a variety of outcomes since 1998. Longer-term rates (using the 10-year as a proxy) have risen in fully 17 of the past 25 years, even though the Fed has not tightened even once in the previous 25 Octobers. Stated another way, an interest rate curve steepening has happened in about two-thirds of the time in recent years. What this tells me is that bond investors have considered economic vitality to be generally good as we enter the fourth quarter, equity markets aside. So, will longer-term rates rise, and the curve steepen? Stay tuned. And you equity investors: buckle up. Jim Reber (jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. Community Banker 13
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