How the Aggressive Increase in Yields Affects Credit Unions

Recent Federal Reserve actions will have implications for credit union lending and earnings.

The Federal Open Market Committee (FOMC) raised the Federal Funds rate by 75 basis points on June 15 in an aggressive move to tamp down inflation. The FOMC also signaled they may increase the overnight target rate to a range of 3.00-3.50% by the end of the year.

This has caused the Treasury curve to move significantly higher to reflect this new expectation. On July 12, the two-year yield was at 3.03%, and the 10-year yield was at 2.95%. The two-year Treasury yield increased 230 basis points since year-end and has not been above 3% since December 2018.

GoWest Solutions partner Catalyst Strategic Solutions says this aggressive shift in yields affects credit unions in a couple of areas.

The two-year risk-free investment rate is now at 3.03%, and it suggests 60-72-month auto loans should be approaching 3.5-4.0% to adjust for credit exposure. Additionally, the 30-year fixed rate mortgage loan is around 5.5%. The rate increases will likely slow loan activity over the next few months, as asset prices are higher due to inflation and supply issues and financing costs are accelerating.

The increase in rates does not appear to have an impact on deposit pricing yet, and if loan demand slows, liquidity should be relatively stable. Keeping cost-of-funds pricing steady provides the ability to build back the net interest margin that has been eroded over the last few years. Net interest margin on average has fallen from 3.24% in 2016 to 2.63% at year-end 2021. Credit unions can take advantage of the recent increase in rates to improve earnings by actively adding current market rate assets to the balance sheet.

Catalyst Strategic Solutions’ team of experienced advisors has the skills and know-how to aid your credit union in building an effective short-term strategy for the road ahead.

For more information about Catalyst, visit its partner page or contact the GoWest Solutions team to get connected.

Posted in GoWest Solutions, Top Headlines.