We have all heard comments over the years regarding rising interest rates and depositories’ bond portfolios.
However, instead of lamenting – “Rates went up and I should have locked in those gains” or “With the ten-year rising am I going to lose money on my investments?” – now is the time to look at long-term, sound asset liability management.
If you had a crystal ball and knew the direction of interest rates BEFORE they moved, you would be the richest person on earth. The reality is that banks and credit unions run “funded” portfolios and should be less concerned with the direction of interest rates and more concerned with the level of interest rates. When interest rates go up, fixed rate asset prices do go down and that includes bonds, fixed income mutual funds, loans, etc. That is how present value math works. Of course, when interest rates increase, the value of the core deposit franchise moves in the opposite direction.
That is why sound asset liability management is so important to a bank or a credit union. Our clients and mutual fund investors are depositories first and mutual fund and bond investors second. Looking at a financial institution’s securities portfolio in a vacuum is not effective. Fundamentally, banking has its roots in the management (and ultimate success) of three main functions…
