The Impact Of Market Rates On Credit Union Investment Portfolios

Credit unions should remain cognizant of how the prices of bonds within their portfolio are shifting.


It’s no secret that bond yields are on the rise. As the chart below shows, the yield curve has gotten significantly steeper over the past several months.

The impact of the steepening yield curve on your credit union’s portfolio depends on the structure of your individual portfolio and if, or when, you need to sell bonds for liquidity or other institutional needs. However, here are a few examples of how the increasing yields impacted bond prices during the month of August 2013:


  • U.S. Treasury 2-year note rose in yield from 0.31% to 0.38%, resulting in a price decline of approximately one-eighth of a point.
  • U.S. Treasury 5-year note rose in yield from 1.4% to 1.6%, resulting in a price decline of approximately one point.
  • U.S. Treasury 10-year note rose in yield from 2.58% to 2.75%, resulting in a price decline of slightly more than two points.

Many callable agencies and mortgage-backed securities are trading at a steep discount compared to their original purchase price. The value of the call option has declined and many callables are now trading to the maturity with little value placed on the call feature. Credit unions, typically heavy callable agency investors, should keep this trend in mind and remain cognizant of how the prices of current bonds within their portfolio are shifting.

An Overview Of The Industry’s Investments

As of June 30, 2013, all U.S. credit unions combined held a total of $402.3 billion in investments. As of June 30, 2013, 12-month investment growth was a mere 2.3% compared to double-digit growth of 13.3% in this category the previous year. Despite the slowing of investment growth for the industry, the amount of investments held is still a significant portion of credit union assets, which total more than $1.07 trillion.

A Shift In Investment Maturity

Credit unions have extended their investment maturities over the past year; 31.8% are now in investments with durations longer than three years. This is nearly double the 2009 percentage in the same investment category. The industry’s allocation in investments with maturities of less than one-year is shrinking, from 45.2% as of June 30, 2012, to 42.7% as of June 30, 2013. Investments with durations between one and three years have also declined as a percentage of the total investment portfolio over the past 12-months. Currently, just over one-fourth of credit union investments are in one to three year duration securities versus 28.8% in June of 2012.


Advantages Of Short Duration Strategies

As credit unions review and reposition their investment portfolios, one alternative investment option that might not be part of their existing strategy is short-duration mutual funds. These funds typically invest in Treasury, mortgage-backed securities, and agency bonds, maintaining an average duration usually less than two years. That makes them less sensitive to interest-rate increases. As a result, they offer a better return than that of money-market funds without much additional duration risk, analysts argue.

Credit unions can typically redeem shares in a mutual fund the same-day or next-day based on their current net asset value. This can help provide the flexibility credit unions need as loan demands increase. Institutional investors can quickly access their investment dollars as needed without having to decide which individual securities to sell. When using mutual funds, CFOs and investment managers should choose a partner who understands the industry to ensure the underlying securities are all permissible investments for credit unions.

About TRUST, Mutual Funds For And By Credit Unions

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 ustoday to learn more or visit

Mike Philbin is the vice president for Callahan Financial Services, a subsidiary of Callahan & Associates that was founded to expand the investment alternatives available to credit unions. Philbin is involved in both the marketing and sales functions for the TRUST Mutual Funds.

TRUST Mutual Funds (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 TRUST mutual funds. Goldman Sachs & Co is the advisor of the TRUST mutual funds. To obtain a prospectus which 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.


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