CFO Focus: Not the dreaded ‘D’ word

Don’t allow rate outlooks and price risk expectations to drive the duration decision. Answer these six questions instead.

“I am really concerned about these long assets!” –At least one member on your board

The year was 1996, and I was in an asset/liability committee meeting early in my career. The topic of the conversation was interest rate risk, and someone shared a graph illustrating historical trends for the 30-year mortgage rate. At the time the rate was approaching a 30-year low of 7%. Thirty-year U.S. Treasury bonds yielded 7.5%.

The objective with this illustration was to help rationalize their decision to not follow a strategy recommendation we had made in the two previous ALCO meetings, which was to purchase government-sponsored enterprise mortgage collateralized investments funded with short-term borrowings. Despite managing a balance sheet that was clearly asset-sensitive and demanded long-duration assets, their view was that purchasing long-duration assets was an unwise strategy given rates were near the historical low.

“You’re too young to remember when mortgages were at 15%. It wasn’t pretty.”

 

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