As of Dec. 31, 2013, credit unions in the United States held more than $378 billion in investments. As the chart below shows, that’s a $7.2 billion decrease from third quarter’s total of $385 billion. It’s not only total investments that are shrinking, however. For the past year, investment growth has slowed and the -1.77% growth rate posted at year-end 2013 marks the first time since fourth quarter 2006 the rate has dipped into negative territory. Despite this trend, the investment portfolio still comprises a significant portion, 35%, of the industry’s total asset composition.
Federal agency securities — such as agency debt, mortgage-backed securities, and collateralized mortgage obligations — remain the investment of choice for credit unions. These securities represent more than half, 51%, of total credit union investments. Cash at other financial institutions, the next most popular investment vehicle, comprises only 15% of the investment portfolio. Despite their popularity, investments in agency securities declined by $6.4 billion in the fourth quarter of 2013. This suggests credit unions, in a need to increase liquidity, did not reinvest agency redemptions and prepayments in the bond market.
Yield On Investments
The average yield on investments has been creeping up since bottoming out at 1.07% in the first quarter of 2013. The average investment yield increased three basis points to 1.14% during the fourth quarter 2013. With short-term rates predicated to remain low for the foreseeable future and the five- to 10-year sector offering higher yields, some investors are looking further out on the yield curve. However, most have not made trades significant enough to shift their portfolios in this direction.
The average investment maturity allocation for all U.S. credit unions in the fourth quarter remained relatively unchanged versus third quarter. Many securities with embedded options — such as callable agencies, mortgage-backed securities, and collateralized mortgage obligations — whose expected maturity was extend earlier in the year remain in the same maturity category. Investments with maturities of less than one year or one-to-three years declined $7.7 billion, demonstrating that credit unions were using their short-term liquidity to manage deposit outflows. Investments beyond three years remain unchanged, reflecting higher rates and frozen portfolios.
Given the recent move to higher rates and the significant portion of total industry assets that investments represent, the importance of properly managing the credit union’s investment portfolio remains an important piece in the overall management of the credit union.