Wells Fargo & Co. has lost patience waiting for that elusive increase in long-term interest rates.
Instead of clinging to a strategy that works best when rates rise quickly, San Francisco-based Wells Fargo is shifting into investments that provide higher yields but perform poorly as rates climb.
“We’re preparing ourselves for a long march at the longer end of the curve,” Chief Financial Officer John Shrewsberry said on an earnings conference call with analysts Tuesday.
The odds of a September rate increase from the Federal Reserve have dropped to roughly one-fifth where they were in December, based on the prices of futures contracts linked to the fed funds rate. Wells Fargo’s response: buying interest-rate swaps to convert floating-rate loans into fixed rates, locking in higher income and reducing the position’s flexibility when rates rise.
As a sign of conviction that higher interest rates won’t erode the value of its portfolio, Wells Fargo boosted its securities portfolio to $341 billion at the end of June from $279 billion a year earlier, Shrewsberry said in a phone interview.
“I haven’t heard that yet from any others,” Shannon Stemm, an analyst at Edward Jones & Co. in St. Louis, said in a phone interview, referring to Wells Fargo’s competitors. “I’m sure that now that Wells has said that, others are going to be asked similar questions on their calls.”
Traders have pushed back the projected timing of an increase in the fed funds rate as Fed Chair Janet Yellen prepares to address Congress this week on the U.S. economic outlook. Yellen has said the central bank will raise rates this year if U.S. economic growth cooperates.
“We will be lower for longer than we would have thought six months ago, a year ago, or a couple of years ago, and how we are managing the balance sheet is a reflection of that,” Shrewsberry said.
In May 2014, the bank said the net interest margin benefit from a 100 basis-point parallel shift in interest rates would be 10 percent to 30 percent. That’s come down closer to 10 percent, which reflects the company’s current thinking, Shrewsberry said.