Pub. 11 2021-2022 Issue 2


Rates Don’t Matter Much If You Have A Plan

Rate volatility has been a common theme in the last 18 months – a global pandemic, unprecedented government spending, recession fears, recovery, a presidential election, and a vaccine, just to name a few. The 10-year Treasury yield saw a high of 1.77% and a low of 0.50% in those 18 months, with a 100+ bps drop in 13 business days from mid-Feb. to early March 2020. Financial institutions that live and die by their margins watched the fireworks while crossing their fingers that credit would hold out.

In the last month, that same 10-year Treasury yield has retreated from recent highs to settle near 1.25%, continuing the margin compression that so many felt throughout 2020. This has made the 1.60%+ average seen in April and May feel like a market opportunity in retrospect. However, some institutions didn’t miss their chance because they had approved, implemented, and prepared strategies regardless of upcoming rate environments. That is to say, rather than looking externally at rates and predictions, the most thoughtful institutions looked internally at their own exposure and created a strategy that did not rely on a prediction of rates.

At Piper Sandler, we believe in custom solutions for each individual balance sheet, and thinking of your bank’s exposure is more relevant than considering the past or future rate environment. For example, if your Asset/Liability report shows that you are heavily asset sensitive, you could react in two different ways: one, you could hope that rates go up; or two, you can reduce your asset sensitivity to balance your exposure up and down.

We, as an industry, focus on rates. However, we also make statements that we “never bet on rates,” as banks know they cannot predict what rates will do. But each asset-sensitive or liability-sensitive balance sheet is making a bet on rates. A balanced A/L profile, as opposed to one exposed to a rate scenario, allows a bank to make tweaks or adjustments as rates shift, rather than sweeping course changes or major corrections. Bet on your bank, not rates; let your lenders and deposit gatherers create interest rate risk with the best products they offer and make adjustments in other parts of your balance sheet to equalize. For example:

  • Too much-floating rate loan exposure, creating an asset sensitive bank:
    • Consider buying longer-dated bonds
    • Swap the floating rate loans to fixed with an interest rate swap
  • Too much cash is creating an asset sensitive position:
    • Deploy the cash into fixed-rate securities
    • Pay down wholesale funding or non-core deposits
  • Mortgage origination is up, and these longer assets are making your bank liability sensitive:
    • Consider swapping the loans to floating with a last-of-layer interest rate swap
    • Consider swapping short borrowings out to fixed with an interest rate swap

Please note, none of these strategies make comments about rate predictions, but rates play a role; once a strategy is created, execute it when rates are accommodating. For example:

  • If you know you need longer-dated bonds to balance a shorter loan book, be ready to buy when rates move up. Do not wait for the rate move to create and approve the strategy – it will be too late.
  • If you know you are too asset sensitive and you want to swap floating rate loans to fixed with a received-fixed interest rate swap, take advantage once there is steepness to the curve. Do not try to add derivatives to your bank’s policies and practices once steepness sets in – it will be too late.
  • If you know you are liability sensitive, lock in longer rate protection with a pay-fixed swap on short borrowings once the curve flattens out. Do not wait for a flat curve, then try to get the idea on the agenda at the next board meeting – it will be too late.

Prepare your strategy based on your market, your balance sheet, and your bank. Do not base it on rates. Rates are for pricing and execution. There is no “one solution” based on a rate prediction, only the solution that fits your bank’s needs, executed when the market gives you a window. The last 18 months were full of unpredictability, but the banks with strategies, policies and plans in place were able to execute when the timing made sense – rather than start planning when the timing made sense. A football team’s defense doesn’t predict where the offense will go and run there on the snap – they see what the offense presents, position themselves for various scenarios, then adjusts as the players start moving. Your bank should be the same: know what your bank needs, make a plan for a variety of scenarios, execute when the rate environment accommodates.

To learn more about Piper Sandler or the Financial Strategies Group, contact Scott Hildenbrand at or visit