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Shift in Yields Affects Credit Unions

By Casey Peterson, Catalyst Strategic Solutions Senior Advisor
Recent Federal Reserve actions will have implications for credit union lending, as well as earnings. 

The Federal Open Market Committee (FOMC) raised the Fed Funds rate by 75 basis points on June 15 in an aggressive move to tamp down inflation that has weaved its way into the economy. 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. 

With that, the Treasury curve moved significantly higher to reflect this new expectation. On July 12, 2022, the 2-year yield was at 3.03%, and the 10-year yield was at 2.95%. The 2-year Treasury yield increased 230 basis points since year-end and has not been above 3.00% since December 2018.  

The aggressive shift in yields affects credit unions in a couple of areas. The 2-year risk-free investment rate is now at 3.03%, suggesting 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/supply issues and financing costs are accelerating.  

The increase in rates does not appear to impact 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.

For more information on building an effective short-term strategy for the road ahead, contact Catalyst.