How the Fed’s Twist Could Impact A Portfolio

With the Fed’s Operation Twist bringing down yields on long-term bonds, consider actively managed duration products for your investment portfolio.

 

By Trust for Credit Unions Mutual Funds

 

The Federal Reserve officially began its Operation Twist plan in late September and the market has already started to react – with bond yields falling on the long-end of the curve and the stock market expecting lower growth. The overall plan is for the Fed to sell $400 billion of U.S. treasuries that it holds with maturities of three years or less and buy $400 billion in U.S. treasuries maturing in six to 30 years over the next nine months. The goal is to drive down yields on long-term bonds.

Click on graphs for larger view  |  Source: Bloomberg, Oct. 17

Credit unions that rely heavily on their net interest margin to earn the majority of their total income will feel more pain from a decline in long-term rates. However, with rates already at historically low levels, there are still questions about how much lower they will go.

Nearly all credit unions have been experiencing lower interest rates on their investments – especially as higher-yielding securities mature. The idea of reinvesting in long-term bonds at even lower rates is not palatable for many credit union investment managers. Fortunately, there are other options that can help ease the pain of reinvestment – now and in the future – by pooling funds into a portfolio of securities that is professionally managed to create more value throughout a variety of investment environments.

Actively Managed Duration Options for Credit Unions

Credit unions that rely heavily on their net interest margin to earn the majority of their total income will feel more pain from a decline in long-term rates. However, with rates already at historically low levels, there are still questions about how much lower they will go.

Nearly all credit unions have been experiencing lower interest rates on their investments – especially as higher-yielding securities mature. The idea of reinvesting in long-term bonds at even lower rates is not palatable for many credit union investment managers. Fortunately, there are other options that can help ease the pain of reinvestment – now and in the future – by pooling funds into a portfolio of securities that is professionally managed to create more value throughout a variety of investment environments.

Actively Managed Duration Options for Credit Unions

One actively managed duration product that credit unions can use is the Trust for Credit Unions (TCU) Portfolios. TCU offers three investment options:  a Short Duration, which as a two-year average duration target, Ultra-Short Duration, which targets a nine-month duration, and a Money Market Portfolio, which is an overnight option. All three TCU Portfolios are open-ended, which means they have no maturity date. Shares can be purchased or redeemed at any time based on the credit union’s needs and the Portfolios offer same day settlement or next day settlement, subject to applicable trading cut-offs and holidays.

Options like TCU exist to help credit unions manage their investment portfolios through various interest rate environments and investment landscapes. They can be used as part of an overall balance sheet strategy or as a supplemental component to complement other types of investments and providing diversification.

Want to learn more?

The Trust for Credit Unions provides ongoing education about the economy and institutional credit union investment options through online resources, live webinars and more. A recorded version of TCU’s Fixed Income University series is available for On-Demand viewing here.

Contact us today at info@trustcu.com or 800-237-5678 to request a copy of the Trust for Credit Unions’ prospectus or to learn more.  

The Trust for Credit Unions was created specifically for credit unions and offers three portfolio options to match credit unions’ various balance sheet objectives. To learn more, visit www.trustcu.com.

The Trust for Credit Unions (TCU) is a family of institutional mutual funds offered exclusively to credit unions. Callahan Financial Services is a wholly owned subsidiary of Callahan & Associates and is the distributor of the TCU mutual funds. Goldman Sachs Asset Management is the advisor of the TCU mutual funds. To obtain a prospectus that contains detailed fund information including investment policies, risk considerations, charges, and expenses, call Callahan Financial Services, Inc. at 800-CFS-5678. Please read the prospectus carefully before investing or sending money. Units of the Trust portfolios are not endorsed by, insured by, obligations of, or otherwise supported by the U.S. Government, the NCUSIF, the NCUA, or any other governmental agency. An investment in the portfolios involves risk including possible loss of principal.

This sponsored content article is provided to the credit union community for shared insights and knowledge from a recognized solutions provider in the industry. Please note that the views and opinions offered here do not reflect those of Callahan & Associates, and Callahan does not endorse vendors or the solutions they offer.

If you are interested in contributing an article on CreditUnions.com, please contact our Callahan Media team at ads@creditunions.com or 1-800-446-7453.

 

Oct. 24, 2011


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