Increased volatility in the capital markets, similar to what we’ve experienced in recent months, can uncover both challenges and opportunities for bank investment portfolios.

Bank investment portfolios generally use high quality fixed income investments in an effort to provide a source of liquidity and income – and to balance the duration and liquidity profile of their loans and liabilities. As investment portfolios have grown from 14% of banking industry assets in 2007 to 20% of assets as of June 2013 (according to the FDIC) they have also become a more critical source of bank earnings. At the same time, regulatory challenges and low yields have pushed some banks into suboptimal investment portfolio allocations.

These portfolios include fixed income sectors that source returns primarily through maturity extension (duration) and negative convexity (mortgage-backed securities prepayment volatility). The current interest rate environment, as well as the industry’s focus on the risk of rising rates, makes these sources of return less compelling.

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The Author

Justin J. Ayre

Account Manager, Financial Institutions Group

Chitrang K. Purani

Portfolio Manager, Financial Institutions


Past performance is not a guarantee or a reliable indicator of future results. Investing in the bond market is subject to certain risks, including market, interest rate, issuer, credit and inflation risk. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Sovereign securities are generally backed by the issuing government. Obligations of U.S. government agencies and authorities are supported by varying degrees, but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value. Income from municipal bonds may be subject to state and local taxes and at times the alternative minimum tax. Corporate debt securities are subject to the risk of the issuer’s inability to meet principal and interest payments on the obligation and may also be subject to price volatility due to factors such as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity. Investors should consult their investment professional prior to making an investment decision.

The yield to worst is the yield resulting from the most adverse set of circumstances from the investor's point of view; the lowest of all possible yields.

Hypothetical and simulated examples have many inherent limitations and are generally prepared with the benefit of hindsight. There are frequently sharp differences between simulated results and the actual results. There are numerous factors related to the markets in general or the implementation of any specific investment strategy, which cannot be fully accounted for in the preparation of simulated results and all of which can adversely affect actual results. No guarantee is being made that the stated results will be achieved.

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