Pub. 14 2019-2020 Issue 4

WWW.NEBANKERS.ORG 28 Thoughts on Investment Management Six Points to Ponder 1. When determining investment strat- egy, some banks simply react to changes in their liquidity position. If loan growth slows and liquidity rises, they’ll commit more to the securities portfolio.Otherbanksaremoreproac- tive.They’llseethevalueinpositioning early for the next big move in rates, which is likely tobe lower. Thatmakes much more sense. Normal balance sheet cyclicality will always play a role, but the bestmanagedbanks are those that read the signals frommarketbehaviorandyield curve trends, and make invest- ment decisions accordingly. 2. The Fed would love to engineer a soft-landing, and at this point they’ll want to see if the nine rate hikes they did were enough to slow things down without choking off all growth. Time will tell. As we near the end of 2019, it appears they’ve overdone it and will need to move the policy rate lower. 3. The yield curve often entices you to do precisely what you shouldn’t. At the trough of the cycle the curve is steep and investors feel compelled to lengthen maturity to pick up incremental yield. But the trend for rates and the curve thereafter is normally higher and flatter. All is reversed at the peak of the cycle. The time to extend duration and lock in yield is at the peak of the cycle when the curve is flat or inverted. And always remember, yield is an opinion but cash flow’s a fact. Lock-in the yield by anchoring the cash flow with bullet, or bullet-like, bonds. 4. Banks should be locking in bond yields that remainmuch higher than the average over the last decade. They should also assess their ap- petite for tax exempt income, and structure cash flows so that they’ll not experience painful reinvestment risk into lower yields if the Fed cuts rates. In other words, transition from protecting value to pro- tecting income. Jeffrey F. Caughron , Managing Director, The Baker Group