Pub 1 2021 Issue 4

20 | The Show-Me Banker Magazine By Jim Reber ICBA Securities SLIPPERY SLOPE Another yield curve shift has community bankers guessing. Balance Sheet Academy ICBA Securities and its exclusively endorsed broker Vining Sparks announce the 2021 Balance Sheet Academy. It will be presented in a live session Oct. 18-19 in Memphis, TN. This intermediate-level course will discuss a variety of topics, including interest rate products and portfolio modeling. Space is limited. Visit viningsparks.com to register. Up to 12 hours of CPE credit are offered. And now for something completely different. Except it’s not; it just hasn’t been around for a number of years. But it most assuredly has an impact on your community bank’s bond portfolio and on the securities you’ll be thinking about purchasing the next time you’re in the market. I’m speaking once again about the ever- popular slope of the yield curve. For our purposes, these are the yields on the various on-the-run Treasury issues, specifically those at the two-year and 10-year maturity terms. They are the most popular benchmarks for bond market analysts when the slope of the yield curve is discussed. What is different so far this year is that the slope, or difference in yield at the benchmarks, has both grown and shrunk in a few short months. This surely doesn’t look like a secular trend vis-à-vis 2017 through 2019, when the slope gradually, grindingly, flattened by more than 100 basis points (1.0%). So, now that we’ve established that bond yields of differing tenors seem to have minds of their own, what does that mean to your community bank? More is better, usually Most community bankers had wished for higher rates since late 2019 when the economy started to lose oil pressure. Loan demand (but not credit quality, thankfully) had already begun to deteriorate by the time “COVID-19” became part of our vocabulary. In short order, the Federal Reserve pushed short-term yields to near zero, began buying billions of bonds each month and launched a series of programs to backstop the economy. The yield curve and – not surprisingly – net interest margins flattened. What we experienced in the first quarter of 2021 is known as a “bear steepener,” which occurs when monetary policy is on hold at the same time bond investors get the shakes about inflation. With all the fiscal stimulus coursing through the economy’s veins, long-term buyers demanded more protection against purchasing power erosion, and the slope of the curve jumped nearly 80 basis points by March 31. Alas, this trend proved to be short-lived. In the second quarter, especially after the Fed’s June meeting, the bond market gave back a large portion of the 2021 yield improvement. By the halfway point in the year, the curve’s slope was back down by about 35 basis points. This was not welcome news for portfolio managers, who are still hustling to invest idle cash, which is probably leaving margins exposed to falling rates. What shape indicates This is probably a good time to recount what the slope of the curve telegraphs about investor sentiment. If long and short rates