Let’s first look at changes in the UST curve over the last few years. UST Curve 1 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr June 2020 0.13 0.18 0.16 0.16 0.18 0.29 0.49 0.66 June 2021 0.05 0.06 0.07 0.25 0.46 0.87 1.21 1.45 June 2022 1.28 2.51 2.80 2.92 2.99 3.01 3.04 2.98 June 2023 5.24 5.47 5.40 4.87 4.49 4.13 3.97 3.81 Sept. 2023 5.55 5.53 5.46 5.03 4.80 4.60 4.61 4.59 Table shows changes in the U.S. Treasury curve in the last three years. Federal Reserve. federalreserve.gov. While the U.S. economy was dealing with the fallout caused by the COVID-19 pandemic, the U.S. government, the Federal Reserve and the U.S. Department of the Treasury were busy providing fiscal stimulus and relief packages. In addition to the CARES Act and the American Rescue Plan, monetary policy actions like quantitative easing and holding interest rates near zero, the Paycheck Protection Program, student loan forbearance, and stimulus checks to individuals flooded the markets with liquidity. Deposit balances at banks surged. As the pandemic eased and consumers returned to work and resumed normal purchasing patterns, supply-chain bottlenecks and the stimulus-induced liquidity caused inflation to rise to levels not seen since 1981. These inflationary concerns caused long-term rates to rise. Between June 2020 and June 2022, the five-year treasury, a benchmark for commercial loans, rose by 272 basis points, while short-term rates rose by only 125 basis points. In response to the rapid onset of inflation, the Fed began raising its target rate. The federal funds rate has now been raised 11 times in 17 months for a total of 525 basis points. Initially, the UST curve maintained its positive slope, but eventually, the long end of the curve couldn’t keep pace, resulting in the inverted curve we have today. The following graphic illustrates how the UST curve has changed. It should be noted that the short end of the UST curve historically tracks the federal funds rate very closely while the long end of the curve does not. Graph shows changes in the U.S. Treasury curve in the last three years. Federal Reserve. federalreserve.gov. Let’s now look at how bank performance has changed due to this rapid increase in rates. The table on the next page is the median data gathered from all commercial and savings banks with total assets below $10 billion. 7 West Virginia Banker
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