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A Direct Line Blog

For Every Rise, There is a Fall

July 3, 2024 7:30 am

By Ian Trebilcock, AIM Financial Analyst

Well, we have experienced the rise in interest rates…  Are you ready for the fall?  The question does not seem to be if, but when the Federal Reserve will start to cut interest rates. As of June 7, interest rate traders assigned a 47% probability to the Fed making its first quarter-point cut in September, down from 55% a day ago, according to CME Group’s FedWatch Tool. On the other hand, traders lifted the odds of the first rate cut coming in December to 40% from 27% the previous day. What can you do to position your credit union to handle a decrease in interest rates?

Investment Portfolio Management

If you have been holding excess cash to take advantage of higher interest rates, now may be the time to invest that cash into other investments and lock in some longer-term yields. This will extend the duration of your investment portfolio and provide some protection against falling interest rates.  Remember that a ladder approach works well, giving you a nice balance between yield and liquidity needs. Also consider some options that you may not have looked at in a while. There are some CMOs out there that are discounted enough to give you both yield now and prepayment protection in falling rates.

Loan Portfolio Management

Focus on growing high-quality income and attracting new members by increasing loan originations. Make sure your loans are priced correctly to increase your loan portfolio while rates are at their peak. Also, be sure your adjustable-rate loans have a floor that will still provide a good rate of return and keep in mind that these loans may prepay faster than what you have experienced recently if rates do fall significantly.

Balance Sheet Management

Actively manage the balance sheet to make sure you are maintaining a solid interest rate margin. Once rates begin to fall, make sure you are looking at the rates you are paying to your members through cost of funds. Recent market share certificate rates have been quite high, particularly on specials. While it may likely be necessary to keep those going, a focus on shorter terms will allow you to reprice those certificates while still maintaining higher yielding loans or investments with longer durations.

As always, reach out to an AIM representative if you have any questions or would like to talk through any of these strategies. We are happy to review your investment portfolio for opportunities to lock in some yield or run higher prepay/elevated cost of fund scenarios on your next ALM report.

Since 1992, the Asset & Investment Management Service (AIM) has consulted with credit unions of all asset sizes, providing sound, practical and impartial financial advice. With AIM, you can join a trusted partner who will help manage your assets and meet your targets. AIM offers a variety of products and services to assist credit unions with ALM, liquidity, investing, and other related issues.

Email:  |  Phone: (855) 882-8474  |  AIM Asset & Investment Management 

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