Balance Sheet Strategies Shifting with Rising-Rate Environment

The second quarter of 2004 marks a pivotal point in the landscape of the yield curve and the Federal Reserve’s monetary policy stance. Balance sheet strategy will be crucial following economic growth in the first quarter and with concerns of inflation began to mount.

 
 

The second quarter of 2004 marks a pivotal point in the landscape of the yield curve and the Federal Reserve's monetary policy stance. After 9/11, interest rates tumbled to new lows, but the majority of economists projected recovery by year-end 2002.

Every year since 2002, all the experts expected interest rates to rise. Each year credit unions, as well as the majority of most financial institutions, positioned strategies for a rising-rate environment. Instead, plagued by the earnings scandals and world security concerns, interest rates remained at these low levels from 2002 through the first quarter of 2004.

Now reality has struck. Treasury rates began to ascend in April following the news of economic growth in the first quarter and concerns of inflation began to mount.

Though credit unions reported a solid quarter of growth and earnings, challenges lie ahead as the economic environment changes shape. America's 9,406 credit unions reported a rise in loans outstanding of 4.1% from the first quarter 2004. Led by real estate and auto lending, the loan portfolio topped $403.4 billion with assets reaching $649.7 billion at mid-year.

Share growth at 1.4% for the quarter continued to lag behind loan growth resulting in an increase of 1.9% to the loan-to-share ratio of 71.75%. Cash and investments declined by 3.0% from the first quarter, with liquidity tightening as share growth lagged behind loan growth.

 

 

 

Sept. 6, 2004


Comments

 
 
 
  • Is the move to longer investments just an impatient push for yield as the compressed margin has hurt ROA over the last few quarters and CU management is feeling pressure to improve earnings performance regardless of the long-term risks involved?
    Anonymous
     
     
     
  • I am surprised that CU investment managers are lengthening the duration of their investments in a rising rate market. The spread between 6 mo. and 2 yr. treasuries has been narrowing for almost three months. It seems counterintuitive to invest long in a rising rate environment.
    Anonymous