Articles

In January, the NCUA circulated an advisory note on Liquidity Risk Management, highlighting the funding pressures that credit unions are experiencing due to high loan demand and slower share growth. A few days later, the NCUA released their supervisory priorities for 2024 which listed Liquidity Risk right after Credit Risk at the top. With the bank failures of 2023 fresh in our collective memories, many credit unions have spent the last year balancing the operational needs to continue funding loan demand while also seeking to proactively expand emergency liquidity sources. In this memo, we will overview the NCUA’s key areas of focus for effective liquidity risk management along with the resources that Accolade is able to provide to support your risk management program.

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A weak first quarter of economic data supported the thesis that a recession was around the corner, but continued strength in the labor market fueled a rebound in consumer spending which has failed to wilt in the face of higher interest rates.

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The combination of persistently high inflation and the Federal Reserve’s historically quick rate tightening has lifted longer-term yields and slowed mortgage prepayments, lengthening assets at many credit unions.  With 30-year mortgage rates currently near their highest levels in the past twenty years (currently revisiting the range of 7.00%+ levels, initially breached last fall), virtually all mortgages on credit union’s books are exhibiting very low prepayment speeds. 

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While the markets look forward for the direction of the economy, the Fed is still looking backward for hard evidence that inflation has been controlled. If we see additional data that indicates economic growth is reaccelerating, the prospects for a pause in rate hikes will certainly diminish. Until economic data forms a consistent narrative, we can anticipate that higher levels of volatility will persist.

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Over the last nine months we have seen the biggest yield curve shock in over twenty years. After the CPI print for May came in at a higher than expected 8.6% year-over-year rate, the yield curve has rocketed even higher and we are seeing red across virtually all bond prices.

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Unrealized losses are accumulating to very high levels for a few reasons: 1) Interest rates moved up a lot in the last year, causing market values on current investments to plummet, 2) investment portfolios are a larger portion of overall assets than normal, and 3) there is a broad precedent to hold most CU investments as AFS in the industry. Why?

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Investment strategy can be intimidating when rates are moving. Credit Unions are not compensated to speculate on interest rate moves, nor can anyone perfectly time the market. A sound investment strategy should be part of a wholistic balance sheet strategy that ensures stable income regardless of the rate environment.

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Default Risk is Transformed into Prepayment Risk for Agency MBS Investors

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FOMC members announced two important changes to their forward guidance.

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Agency MBS and CMOs are complex securities. Read more to learn about the differences between them and how they can impact your portfolio. 

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