Short-Term Ladders and LIBOR FRAPs Are Keys to Success for CUs Now
With so many powerful forces at work in the marketplace, credit unions are not really in a position to influence the resolution of big picture economic problems. Instead, portfolio managers are focused on the day-to-day concern of how to eke out the most income in this stagnant environment. Due to the build-up of excess liquidity over the spring, which has occurred in advance of seasonal loan demand, credit unions are trying to determine the best way to invest funds now, while preserving their opportunity to take advantage of higher rates expected later this year.
One game plan that is proving to be successful for Georgia Central's member credit unions is creating short-term ladders within one year. The goal is to beat the overnight share account yield while assuring money is ready to be reinvested as rates begin to move higher over the coming months. As long as the Federal Reserve keeps the Fed funds target rate at 2.00%, share rates will be hard pressed to change.
Credit unions have been able to add 30 to 140 basis points to their portfolio yield, depending on maturity and investment choice. Some ladders are beginning as short as 60 days. SimpliCD, the turnkey certificate placement and custodial service owned by Georgia Central and the nation's other 26 corporate credit unions, and corporate certificates provide the best vehicles for creating a short-term ladder. SimpliCD rates have been more than favorable over the past few months, reflecting the demand for deposits from financial institutions. However, the recent uptick in Treasury yields is allowing corporate certificates to catch up.
This investment strategy brought success to Georgia Central as well. As of June 2008, year-to-date investment sales have exceeded $1 billion. This is quite an achievement considering that the corporate's total investment sales for 2007 reached $1.2 billion. SimpliCD sales alone have continued to break records, exceeding monthly sales levels on three separate occasions this year. And, year-to-date SimpliCD sales totals have already doubled those made in 2007.
Floating-rate securities also provide a good investment alternative in today's upward rate environment. Rather than being locked in, credit unions can take advantage of each rate increase as the floating-rate instrument resets.
Corporate FRAPs (floating-rate asset program) based off of LIBOR provide a particularly attractive opportunity today--the spread between Fed funds and LIBOR is historically wide, with LIBOR trading over 40 basis points higher. This additional rate difference makes the timing for LIBOR FRAPs optimal, which is something credit unions have recognized. Though Georgia Central has offered FRAPs for many years, the current market environment has created a marked increase in the use of this vehicle. As the global financial markets continue to stabilize and the issues surrounding LIBOR rates come under control, we will begin to see the yield difference narrow--so the time to invest in FRAPS is now.
With analysts changing their interest rate forecasts weekly, the best strategy for credit unions now is to stay as much ahead of their overnight rates as possible while positioning themselves for the upcoming change in rates. Until loan demands appear again, credit unions can find a safe haven in short-term yields.