If a bank expects decreasing interest rates, what type of assets will it likely invest in?

When a bank anticipates decreasing interest rates, it is more likely to invest in assets that are less sensitive to interest rate changes, commonly referred to as rate-insensitive assets. These types of assets tend to maintain their value more effectively in a declining interest rate environment, which helps mitigate the potential negative impacts on the bank's interest margins.

Investing in rate-insensitive assets allows the bank to reduce its exposure to interest rate risk, as these assets generally do not fluctuate significantly in value when interest rates decline. This is particularly important for maintaining stable income and capital preservation during periods where lower interest rates might otherwise compress the returns on interest-generating assets.

In contrast, rate-sensitive assets would typically fluctuate more in response to changes in interest rates, potentially leading to losses or reduced income as rates fall. Equity-sensitive assets are closely tied to the performance of the stock market and can be volatile, while high-yield investments may offer higher returns but usually come with increased risk that doesn't align well with a strategy focused exclusively on protecting against declining interest rates.