Insights from Catalyst

Non-maturity deposits are a critical component of every credit union. One of the key benefits of these deposits is that they offer a fairly stable, low-cost source of funding, while also helping offset asset risk. But, just how much risk can be offset, and how stable are these funds?

“Rates are too low” is a statement that seems to be echoing among investors in the current economic environment. Another popular phrase we’ve heard across the industry is “The economy will turn around and rates will go back up.” Behavioral finance might define such phrases as “anchoring” – the common human tendency to rely on one piece of information or a cognitive bias toward a psychological benchmark.

Through the second quarter of 2020, credit unions experienced an increase in liquidity from slower lending and increased shares. Additionally, credit unions are now experiencing a lower net interest margin. One of the culprits is the mere 0.08 percent they’re earning on overnight cash balances, compared to almost 1.50 percent at the end of 2019.

Although we are living in unprecedented times, our economic environment does feel remotely familiar. It was during the Great Recession that we last experienced such historically low rates, and even though 10 years have passed, many of us still remember it all too well.

For decades, Fannie Mae and Freddie Mac have helped keep the mortgage markets functioning. Their conservator, the Federal Housing Finance Authority (FHFA), allowed the two mortgage giants to adapt their policies to cope with the unique circumstances caused by the COVID-19 pandemic. What do the changes mean for investors in the agencies’ debt and MBS?