Pub. 12 2022 Issue 3

9 PUB. 12 2022 ISSUE 3 To continue this discussion or for more information, please contact Jay Kenney, SVP & Southwest Regional Manager for PCBB, at www.pcbb.com or jkenney@pcbb.com. Dedicated to serving the needs of community banks, PCBB’s comprehensive and robust set of solutions includes cash management, international services, lending solutions, and risk management advisory services. 1. The first opportunity is in buying bonds. When the yield curve is in its usual upward-sloping shape, investors earn lower yields for short-term debt and higher yields for longer-term bonds. In an environment of rising interest rates, bond buyers have to choose between longer-term debt, which carries a better yield, and shorter-term debt, which yields less but gives a buy-and-hold investor more opportunities to purchase newly issued bonds at higher rates. But when the yield is inverted, bond buyers get the best of both worlds: higher yields and more opportunities to buy new bonds as rates rise. 2. The second opportunity is a chance to hedge floatingrate debt with an interest-rate swap. Any time investors use an interest-rate swap hedge, they have to consider whether the value of locking in an interest rate justifies the cost of the swap. However, investors can have the best of both worlds with an inverted yield curve. They can lock in a swap rate less than the rate short-term bonds are paying while also giving themselves longer-term certainty of debt payments with a stabilized interest expense. w

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