Pub 1 2021 Issue 4

August 2021 | 21 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. have very little difference, it indicates investors are relatively satisfied that inflation is not a threat. Two-year buyers will almost always take their cue from the Fed, while 10-year buyers, who are quick to retreat if they sense prices are about to rise, have gradually required less risk premium over the past 30 years since inflation has stayed under wraps. (Investors of a certain age may recall the term “bond vigilantes.” Those institutional buyers would demand higher yields if the combination of monetary and fiscal policies were not to their liking. In the two decades, the bond vigilantes have gone the way of Wyatt Earp.) What took place in June of this year would qualify as a “bull flattener.” Longer rates retreated when the Fed, and in particular chairman Jay Powell, put the bond market more at ease regarding incipient inflation fears. The flatter curve means that longer-term investors are not rewarded as much for their additional price risk. That is relevant to community banks in 2021, since bond portfolios are as long as they have ever been, using duration as an indicator. Where to go from here What’s the next move for the shape of the yield curve? I’m not going to hazard a guess, but I will point out some tidbits of interest. For one, the current slope of about 120 basis points is almost exactly the past 10 years’ average. For another, the recent yield rise for the two-year Treasury note also restored its 10-year average spread over Fed Funds. And finally, the Fed’s June dot plot may have shown that more members are projecting the first hike earlier than in the recent past, but the consensus is still in 2023, which is a long way from here. Stay tuned for more reporting on our mountain of debt, as depicted by the thrilling slopes of the U.S. Treasury yield curve. ■ Jim Reber (jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. MIKE HART Account Executive - MO, AR, KS mhart@myservion.com myservion.com We provide financial institutions and borrowers the support they need to reach their financial goals. Re-envision your mortgage strategy. partnership channels Correspondent Retail Wholesale Delegated Conventional FHA, VA, USDA Jumbo/Non-Conforming Quality control Contract processing Contract closing Servicing Appraisal review mortgage products additional services Servion Mortgage is a DBA of Servion, Inc. NMLS #1037 Equal Housing Lender