Catalyst News

Investments and the Recent Move in Rates – What Do I Do Now?

by Catalyst Strategic Solutions | Jul 09, 2019

Since mid-April, the U.S. Treasury yield curve has continued to move lower and invert further. This is no longer breaking news, but the speed with which things changed makes it crucial for credit unions to look at the big picture, plan ahead for what may come and adjust their investment strategy, if needed.

“Several factors contributed to rates moving lower along the Treasury yield curve. It’s imperative that credit unions understand these factors and the implications they could have on their investment portfolio,” said Mark Wert, Catalyst Strategic Solutions Senior Advisor.

Wert gave an investment overview as a panelist at the California and Nevada Credit Union Leagues’ “Your Economy – Your Credit Union” Conference last month. Each year, these leagues host the annual meeting for experts and credit union leaders to discuss the latest economic developments.

“First, let’s explore some of the factors that may have affected the yield curve and caused it to move lower and invert further,” said Wert.

Why did yields drop so much?

Wert offered several explanations:

  • Slower economic growth/weaker data
  • Lack of Inflation
  • Trade wars – flight to quality/risk off
  • Negative yields – about $11 trillion bonds globally
  • Mortgage hedging

“Before the big move, the strategy in 2019, for the most part, had been to add longer duration securities. Why? To put it simply, it was to hedge against potential reinvestment risk. This strategy was, and has been, successful following the Fed’s multi-year tightening cycle that ended in December 2018. This follows the short duration and defensive investing strategy that had worked well during the tightening years,” said Wert.

So, what do I consider as a result?

Some may be wondering if it’s best to change their strategy. Others may be questioning whether or not to start or stop buying. “A lot of this depends on liquidity,” he added. “For this example, let’s assume everyone has liquidity and loan growth is stagnant.”

Next, we look to the market – what is it telling us?

Rates are lower, Wert said, and the Fed is behind the curve:

  • Long-term rates indicate the Fed is behind, with the curve inverted from overnight rates out to and beyond the 10-year point of the curve.
  • Short-term rates indicate the Fed is behind, with fed fund futures pricing in several Fed cuts over the next two years.

What is Wert’s advice for credit unions?

“Consider staying the course,” he said. “Continuing to add longer duration securities may make sense, despite the fact that reinvestment risk has declined over the last two months.”

“Although it’s tempting to stay short and earn a higher yield, the last few months show how that can work against us,” Wert said.

Viewing and analyzing potential cash break-evens, based on potential Fed moves, can help lessen sticker shock, Wert said, as it shows shorter-term forward rates are a lot lower than the Fed’s current target rate range.

Wert closes with this final thought, “Even though rates have declined significantly, they could continue to drop. Buying longer duration securities should help hedge your investment portfolio from further potential reinvestment risk.”  

The advisory team at Catalyst Strategic Solutions is comprised of seasoned professionals with diverse expertise in the financial services industry. As a wholly-owned subsidiary of Catalyst Corporate Federal Credit Union, Catalyst Strategic Solutions, LLC, combines 30 years of experience, a cooperative business model and a comprehensive service portfolio to provide balance sheet guidance to credit unions nationwide. 

To find out more, contact the Advisory Service or call 800.301.6196.