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The Perfect Storm

August 4, 2003
Michael L. Coogan

There is an old saying that warns, “Be careful what you wish for.” On June 25th, the Fed cut rates to 1%. The 10-year Treasury was trading around 3-¼%. Swap spreads were tight as a drum. Prime had just moved to 4%. Mortgage prepayments were projected to intensify further. As we all know, they did. Deflation, not inflation, was the current economic topic. Bank interest margins were compressing each month. As we looked at our asset/liability report, further interest rate decreases would crush the economic value of our institution. In short, most portfolio managers wished for higher rates. Be careful what you wish for.

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