Pub. 1 2020 Issue 1

www.cbak.com 8 In Touch It was 20 years ago today More precisely, it was 20 years ago this year that community banks, and their investment portfolios in particular, were enduring a period of extremes. Many of the readers of this column were in charge of their bond portfolios then, and were, proverbially, “Riders on the Storm,” which involved: • Inflation, which actually used to be a problem, was gaining traction. The year-over-year Consumer Price Index (CPI) was more than 3% and rising. • Since the economy was doing quite well, unemployment dropped from 4.7% in 1998 to 4.0% at the end of 1999, which was a 30-year low. • The Federal Open Market Committee, chaired at the time by Alan Greenspan, was busy stomping on the brakes. Overnight rates rose 250 basis points (2.5%) between 1998 and 2000, finishing at 6.5%. This remains by far the highest level we’ve seen since. The 10-year Treasury note reached 6.79% in January 2000. • Bond portfolios’ market values took a beating: The average community bank’s bonds had more than a 3% loss in 1999, which is enormous on a historical standard. In short, it appeared we were on “The Eve of Destruction.” Glory days As we’ve learned over the decades, bond portfolio management is a give-and-take proposition. If your collection of securities is underwater, at least you have the comfort of knowing that your overall yields are heading “Higher and Higher.” At least, if you continue to purchase bonds in that environment. However, 1999–2000 wasn’t a period in which banks were actually buying many bonds, which is also a mixed blessing. The aforementioned Fed rate hikes accompanied a very healthy ROCK (AND ROLL) INTO A NEWDECADE A Look Into A Previous Era Can Help Today’s Portfolio Managers BY JIM REBER Community Bankers Association of Kansas Endorsed Provider