Busted Brackets and An Inverted Yield Curve

Updated: Jun 10, 2019

While you were tending to your brackets, the yield curve inverted on Friday, with the yield on the 10-year Treasury note falling below the yield on the 3-month T-bill. This sent many a pundit scrambling to trumpet an inversion’s predictive value as a recession indicator.

Whether a recession is on the horizon is difficult to know. Regardless, for our credit union clients, we suggest the following three action items:

Continue to challenge and stress test your business model.

Legendary Coach Bob Knight probably had stress testing in mind when he said: “The goal is to make practice more difficult, physically/mentally, than anything your players will face during a game.”

Pay attention to the concentration in your loan book and in your sources of funding.

Aside from Danny and the Miracles (Kansas 1988), it is difficult to recall a team that has gone all the way with a single player carrying so much of the scoring and rebounding load. Instead, the best teams tend to be balanced. They too need the flexibility to avoid concentration risk.

Give some thought to secondary capital as a cushion against increased loan loss provisions and potential net worth pressure.

A group of physicists recently looked at lead changes in sports. Their article offered up an equation that can predict when a lead is a safe, based on the size of the point difference and the time remaining. The work suggests that if your team is up by 10 points with about 8 minutes left in the game or have an 18-point advantage at halftime, you are 90% certain of a win. The question becomes: if you can’t afford to lose, shouldn’t you add to your cushion?

Happy March Madness!

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