Navigating Low-Rate Shoals: Guest Opinion
With interest rates at historic lows and economists and the Fed forecasting they will remain there, it is becoming harder to ignore the effects this is having on balance sheet margins. And a decelerating growth rate of U.S. GDP and slowing demand from businesses related to real estate will continue to restrict revenue growth.
While banks and credit Union’s are looking at other areas on the balance sheet–interest income, noninterest income and operating costs–to keep the earnings growth intact, there are limited opportunities that will boost earnings in the fourth quarter. How much room is left to lower expenses and or deposit pricing?
Do not be afraid to selectively extend in duration with some portion of the portfolio, even in a low-rate environment. Duration risk is a very real risk, but it is but one of the many types of risk that we manage. Diversifying these risks and keeping them at levels that you are comfortable with is a key element of portfolio management. Adding exposure to quality well-structured bullet-like securities may not look as lush as some alternatives but will reap the benefit of the yield pick-up available in longer maturities and, over time, these bonds will roll in on the curve and make the shape of the yield curve work for you.
Rolling down the yield curve simply means that an investor purchases a bond with a bullet maturity is at the near or at the top of a steep portion of the yield curve and holds that bond until, over time, its maturity reaches a lower yielding portion of the curve in a traditional shape of a yield curve. In doing so, the investor enjoys the relatively high yield of that bond vs. the lower yields at the shorter end of the curve. Further, if done with short- or intermediate-term bonds, yield curve roll may provide protection against the risk of price decline if interest rates move higher. This is just one of the many strategies that need to be used to give your investment portfolio dynamics that work for you.