The bond market has retreated steadily since major support was broken on March 3rd.
Prices have risen and rates have fallen slightly for the past few days as this CBOT chart shows.
This is not the end of the bear market. It is only a pause before rates start rising again.
All financial institutions should begin lengthening the maturity of their liabilities.
Encourage long-term deposits, borrow from Reserve institutions, and sell bonds.
As rates continue to fall, institutions should get aggressive in the cash market and prepare a futures, options, and swaps program. Educate the Board of Directors and obtain authority for the required actions.
Assets should be re-invested in Fed Funds or at worst, 90 day instruments. Short term assets will continue to rise in yield as the Fed continues to slow the growth of money
Asset pricing must continue to be aggressive, and spreads maintained, even in the face of declining new business, as liability costs will not be falling in the near future. Locking in a low-yielding asset right now is a mistake.
SENIOR MANAGEMENT
Senior management must address the asset/liability situation of the institution and provide the Board of Directors with a comprehensive plan for an extended bear market in bonds.
If the bear market continues, many institutions will fail, as they are unaccustomed to dealing with rising interest rates.
Recall, interest rates have been declining since 1986, and most managers are unfamiliar with the tools, techniques, and emotional requirements for dealing with inflation and rising rates.
See www.paterson.com for help managing your A/L situation.
