An interesting article appeared in last weeks Barron’s
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).