The Yield Curve: Implications for Credit Unions

The intermediate part of the yield curve has seen very little movement in the past year. The challenge for credit unions is forecasting this part of the curve in their ALM process.


An interesting article appeared in last weeks Barron’s magazine, cautioning investors against the presumption that the Fed is through raising interest rates – a presumption driven mostly by the flattening the curve has experienced beginning in June of last year. For credit unions, the crux of the article was the discussion of the intermediate part of the yield curve, between the five and 10-year notes, where borrowers (read members) are sensitive to rate changes.

The intermediate part of the curve has seen very little movement since the Fed began tightening. This time last year, the 10-Year Note stood at 4.11%, versus 4.20% today.

Barron’s cited several economists who are drawing comparisons between today’s interest rate environment and the one that existed in 1994. The one significant difference between the two periods is clear: Overall rate levels for the intermediate sector were much higher in 1994. Their conjecture is that if history repeats itself we should see a significant rise in the intermediate part of the curve relative to today’s levels.

Credit unions managers know their balance sheet asset and liability exposure is correlated with the intermediate part of the curve, certainly with regards to the pricing of fixed-rate mortgages and rates for term borrowings. The real challenge is forecasting where rates will be in the future. An existing asset/liability management forecast might include, as one interest rate simulation, the volatility of the 10-Year note in 1994, where the trading range went from a low of 5.60% to a high of 8.05%. (See graph below).




Jan. 31, 2005


  • Just a teaser; good topic but used as a teaser for a conference.