Published in: CU Business
In response to slower global growth expectations and a more dovish tone from the Fed in 2019, the fixed-income market is now pricing for rate cuts within the next 12 months. As such, some investors have professed a need for specific investments or strategies that perform well in a falling-rate environment.
First and foremost, depository mangers are better served managing interest-rate risk at the balance-sheet level rather than through individual investment decisions. If, for example, model results show falling rates having a more detrimental impact on an institution’s value than desired, increasing overall asset duration and/or purchasing instruments such as interest-rate floors are two ways to mitigate the interest-rate risk associated with said scenario. Doing so would more effectively align the duration mismatch between assets and liabilities if so desired.
Although the outlook may have changed regarding the direction of rates, ALM First’s investment process remains constant. A well-thought-out investment philosophy and disciplined investment strategy can assist your bank or credit union in creating a portfolio that remains sound – in any rate environment. By creating a sound strategy and framework, investment decisions become independent of interest rate levels. That’s why we advise all of our financial institution clients to focus on process, rather than simply considering individual investment options in the context of our outlook for rates.
Be Patient & Take Time to Create a Framework for Sound Portfolio Decision-Making
The investment portfolio serves an important role within a depository’s overall balance sheet management process. Regardless of the portfolio’s specific objective (liquidity, income, etc.), the ultimate goal should be to maximize return per unit of risk taken.