Importance of the Fed’s Beige Book for fixed income investors

Part 6
Importance of the Fed’s Beige Book for fixed income investors (Part 6 of 11)

Must-know Beige Book update on banking & financial services

The Fed’s Beige Book is published around two weeks ahead of its Federal Open Market Committee (or FOMC) meeting. The Beige Book contains information about how the various sectors have performed in the preceding six weeks commencing from the end of the previous FOMC meeting.

What does the banking and financial services sector update include?

The Beige Book report on the various sectors in the economy covers the banking and financial services sector as well. The banking and financial services update includes the updates on loan demand and volumes for consumer, residential, and commercial loans. The update also covers mortgage financing, delinquency rates, and loan quality trends in the 12 reporting districts.

Part 6Enlarge GraphWhat did the Fed’s Beige Book, issued in March, say about economic conditions in banking and financial services?

New York, Richmond, St. Louis, and Kansas City reported decreased demand for residential mortgages, while Cleveland and Atlanta reported increased demand for new purchase mortgages. New York, Richmond, Atlanta, and Kansas City reported decreased demand for refinancing mortgages. The demand for consumer loans declined in the Richmond and St. Louis districts, and also in small to medium-sized banks in New York.

Boston district reported there was “solid” demand for commercial real estate loans. Richmond businesses sought shorter-term commercial real estate loans as the rates on those loans were lower. Chicago, Kansas City, and Dallas reported growth in commercial real estate loans, though there was “marginal” improvement in demand for such loans in Dallas. There was no change in commercial real estate loan demand, according to small to medium-sized banks in New York.

While New York reported modest declines in delinquency rates, delinquencies in Cleveland were stable or trended lower, while delinquencies for most types of loans declined in St. Louis. Kansas City reported improved loan quality compared with last year and which also continued to strengthen in Dallas.

How does the Beige Book’s report of the banking and financial services sector impact debt investors?

An increase in lending activity would imply the economy is expanding and vice versa. An improvement in loan quality and lower delinquencies would also imply an improvement in business conditions and a business environment perceived to have lower risk. Other factors remaining constant, a business expansion would mean the Fed would continue with its tapering of monthly asset purchases, which would reduce liquidity, raising interest rates on the bonds and causing bond prices to fall. The reverse would hold true for an economic contraction. This would impact bond ETFs like BND, TLT, AGG, TLH, and IEF.

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