The last of the presidential debates was held Thursday night and while not as explosive as the first debate did have its moments, but probably nothing that will alter the trend in polling. That polling has Biden leading in most of the key battleground states but with some leads within the margin of error the uncertainty will remain until we get past November 3. The market has been trading under the Biden wins scenario so if either a Trump upset or contested result are the outcome look for volatility to rein with a Trump upset spurring a risk-on trade while a contested result will lead to a risk-off, flight to safety trade into Treasuries. Meanwhile, Reuters was out yesterday with an article that a Biden win with a Blue Wave (Dems taking the House and Senate) will not be as negative for banks as the knee jerk analysis might imply. Yes, a higher corporate tax rate from 21% to 28% is a negative but they felt any tax increase would be delayed until more improvement in the economy is achieved. They also pointed to greater fiscal stimulus spending and tax credits for low-to-moderate income households that could lead to fewer loan losses and more lending revenue. They particularly pointed to expected infrastructure spending with the money flowing through businesses and creating demand for loans. It’s a decidedly optimistic view but one that aligns with the risk-on tone in equities of late.
In our various venues between podcasts, livestreams, and these market updates we’ve often implored bank managers to invest more of the liquidity sloshing around on their balance sheets in order to maintain margins, or at least slow the erosion. We feel the ultra-low rate environment will be with us for awhile and so will the liquidity, especially as Stimulus 2.0 seems a matter of when not if. With that backdrop we found with interest an article yesterday in the S&P Global Market Intelligence that discussed a bank employing that very strategy and thought it worth repeating in the sense that we couldn’t have said it better ourselves.
Hancock Whitney Bank, a $33 billion bank based in Gulfport, Mississippi increased its bond portfolio by nearly $700 million in the third quarter as executives said during an investor call that turning some cash into securities investments helped keep the bank's net interest margin at 3.23%, unchanged from the previous quarter.
Management said the bank moved roughly $600 million from cash held at the Federal Reserve into the securities portfolio. CFO Michael Achary said roughly two-thirds of that cash was invested in mortgage-backed securities. Including about $400 million reinvested cash flows from prepayments, the bank reinvested more than $1 billion into the bond portfolio. That activity put the bank's bond portfolio at $6.8 billion at the end of the third quarter.
"We like to keep the bond portfolio somewhere between 20% and 25% of the average earning assets. So it's kind of right smack in the middle of that range, if you will," CFO Achary said.
So we won’t go on about this but as you can see, a pretty sizeable player sees the light of investing excess liquidity into bonds in order to try and hang onto as much net interest margin for as long as possible. Needless to say, we like the strategy.
Initial Jobless Claims Finally Dip Below 800,000
The best high-frequency, real-time indicator of the trend in the economic recovery remains the Weekly Initial Claims data, and for the week ending October 17 the trend looks to be improving. For the third week out of four claims fell and were well below Bloomberg consensus expectations. Claims totaled 787,000 versus expectations of 870,000 and 842,000 the prior week. And that week was revised lower from 898,000 initially reported. So after spending the last seven weeks in the 800 thousand range claims look, at least for a week anyway, to be breaking lower. Of course, one week does not a trend make but it does provide a hopeful view that claims are finally starting to edge lower again after stalling for nearly two months.
Copper/Gold Ratio Points to Higher Yields
Yes, it’s that time again to revisit one of our favorite coincident yield indicators the Copper/Gold Ratio and what it’s signaling for 10-year Treasury yields. As the chart shows, the copper/gold ratio (white line) has been rising since August and while Treasury yields have been rising of late too, the recent upsurge in copper prices (no doubt driven in part by red-hot housing construction), points to further yield increases in Treasuries. You can see the two series track fairly closely and while they deviate at times they eventually come together. The current copper/gold ratio implies a 10-year yield just over 1.00% and that certainly seems possible if stimulus talks are fruitful and copper prices continue heading higher.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.09%||Unch||1 Mo LIBOR||0.15%||UNCH||FF Target Rate||0.00%-0.25%||3 Year||0.286%|
|6 Month||0.10%||Unch||3 Mo LIBOR||0.21%||-0.02%||Prime Rate||3.25%||5 Year||0.452%|
|2 Year||0.16%||+0.04%||6 Mo LIBOR||0.25%||-0.01%||IOER||0.10%||10 Year||0.889%|
|10 Year||0.86%||+0.20%||12 Mo LIBOR||0.33%||-0.03%||SOFR||0.07%|