Callahan Clients, please log in for direct access to:
Learn What You're Missing
Upgrade Your Subscription
Thank you for your interest in reading the fantastic content we have on CreditUnions.com! However, the page you are trying to access is for subscribers-only. To learn more, select an option below.
All users must now log in to read, research, browse, and have fun on CreditUnions.com. Yes, we still offer freebies. And, yes, it’s worth the extra effort.
Print or PDF this article today because you won't have access to it later. Or, click here to learn how to get 24/7 access.
By Trust for Credit Unions Mutual Funds
Federal Reserve Governor Jeremy Stein’s concerns regarding a potential bond bubble were highlighted in a recent CNN Money article by Stephen Gandel.
“Stein says historically banks have tended to put their money in longer-term bonds, which have higher yields, when interest rates are low. And he sees some of that behavior today,” Gandel writes. “The problem is longer-term bonds tend to lose the most when interest rates rise.” The same trend can be seen, to a lesser extent, among credit unions.
As of December 31, 2012 credit unions held over $378 billion in investments — a 6.1% increase over the previous year. This signifies a reversal of the slowdown in investment growth within the industry that occurred in 2011 as the pace of loan growth began to pick-up significantly, while still falling shy of the 12.3% growth achieved from Dec. 2010 to Dec. 2011.
While nearly half of credit union investment portfolios are currently held in short-term investments (with durations of less than one-year), 23.9% are held in investments with maturities between three and 10 years and another 1.7% have maturities of over 10 years. These longer-term investments could experience price decreases at an inopportune time — as credit unions are beginning to see lending activities ramp up.
So how can credit unions manage investment portfolios that continue to increase while preparing for a potential bond bubble? Two investment alternatives that can help cooperatives take advantage of higher-yields without exposing themselves to longer-term interest rate risk are utilizing short or ultra-short duration mutual funds as part of their overall cash management strategy.
These types of investments can offer credit unions additional options for their overnight and cash portfolios by utilizing an enhanced cash strategy to gain yield without investing in individual securities with longer-term durations. Ultra-short duration funds typically include securities with maturities greater than one year and target a nine-month overall duration, while short duration funds target a two-year duration. Both can offer investors higher-yield potential than overnight or cash options, while remaining relatively short and providing same-day or next-day liquidity.
Whether or not a bond bubble is in our future, credit unions would be wise to take this opportunity to review their investment portfolios and evaluate potential risks. As loan demand continues to increase, having an investment strategy that provides for accessibility and liquidity could become a priority once again as credit unions focus on serving members’ financing needs.
TRUST mutual funds options keep credit unions always invested, are professionally managed, and are based on the cooperative values of credit unions. The Ultra-Short Duration portfolio is one of three options available through TRUST. Callahan Financial Services, Inc., the distributor of TRUST, provides the resources and information credit unions need to support investment decisions. Contact us today to learn more or visit www.trustcu.com.
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 firstname.lastname@example.org or 1-800-446-7453.
March 11, 2013
No comments have been posted yet. Be the first one.
Submit your email address to receive daily industry updates and web-only features.
P: (800) 446-7453 | F: (800) 878-4712
1001 Connecticut Ave. NW Suite 1001
Washington, DC 20036