Investment Trend Toward ‘Bullet Certificates’ Likely To Continue

The investment strategy shift to fixed-maturity, bullet instruments that started in 2004 will likely continue into 2005. Learn the factors contributing to this shift.


Though Structured Certificates May Rebound In A Rising Rate Environment
Despite tightening liquidity during 2004, a hunger for investment opportunities remained strong last year, though it is clear that credit union managers’ appetite shifted toward fixed maturity instruments.

Among the assortment of investment opportunities, the most common form of certificates of deposits investments come in two flavors: "structured certificates" and "bullet certificates."

The structured certificates, with their potentially higher returns, were favored in 2003. However, credit union managers turned in the direction of "certainty" during 2004 by investing more into fixed-maturity, bullet instruments. The percentage of bullet-style certificate of deposits shot up from 38 percent in 2003 to approximately 54 percent in 2004, according to one source. That investment strategy shift that started in 2004 will likely continue into 2005.

The shift from structured certificates to bullets over the past year is attributed to credit unions preparing for the liquidity runoff resulting from an improving economy. Credit union managers stayed relatively short. There is not much yield pickup or flexibility when investing in structures with short maturities. So credit union managers opted for bullet investments.

Another reason for the shift may have been a result of the "callable" feature embedded in many of the structured CDs. The callable aspect can terminate the investment instrument if rates tumble. That happened with some frequency in 2003, thus making some investors a bit reluctant to try the structured certificates in 2004, despite the potential for higher returns.

And finally, another contributing factor to the migration toward bullet investments was that higher returns were offered as the Federal Reserve started tightening its monetary policy. It is likely the trend for bullets will persist in early 2005 as there is expected to be lower volatility in the market, a flatter yield curve and continuing liquidity concerns. These factors might encourage credit union managers to stay relatively short.

Credit union managers should re-evaluate their decisions frequently. Callables do perform better than bullets in a rising-rate environment, which we are currently facing. Different types of structured products satisfy different needs. More sophisticated products such as step ups, fixed-percentage paydowns (sinking CDs) and prepayment-linked notes work well when credit union managers have liquidity concerns.

Looking into 2005, there are also structures that provide benefits to credit unions as the yield curve slopes upward. Credit union managers might also want to look at the capped floaters (with or without call options). They look good as the curve continues to flatten and Treasuries look so rich.

If allegations of accounting manipulation and reports of inadequate capitalization, coupled with potential congressional actions and SEC investigations of FHLMC and FNMA make you concerned, you might want to place your investments in a less volatile arena. Avoiding "headline risk" and finding certificates of deposit that provide sound diversification and structure flexibility are ways to minimize risk.

Organizations like Southwest Corporate Federal Credit Union provide such an alternative to agencies. Not only are there a variety of investment solutions to meet the varying needs of credit unions, the instruments provide higher yields than agencies. Southwest Corporate beat agencies – both on bullet and structured product fronts – by 10-25 basis points.

Southwest Corporate has the expertise and infrastructure to satisfy investments needs at credit unions. For instance, many brokers for agency instruments only take reverse inquiries on orders greater than $25 million, while Southwest Corporate has a much lower threshold. Southwest Corporate provides sound choices and appealing flexibility aimed at making the investment function easier and more profitable at credit unions.

For more information about the special investment opportunities offered by Southwest Corporate, contact the investment department at 972-861-3000 or visit online at

(Southwest Corporate Federal Credit Union is an $8 billion Dallas-based institution serving the financial needs of its more than 1,200 member credit unions.)