Guest Opinion: Take a Stand on Interest Rates
How many of us have marveled at the foresight and success of other individuals and then felt we perhaps missed the boat? How did he know to purchase a house in that rundown neighborhood that eventually turned around? Or pass on paying $400,000 for a house in 2006 that she felt was worth half that? And in 2008, it was. Who thought buying Apple at $7 in April 2003 was a good deal?
Was it luck? Being in the right place at the right time? What did they know that I didn’t know?
Most of these decisions were made on information that was available to all of us. But the difference was these individuals looked at the cold hard facts and took a stand. They analyzed the data, looked at where the economy might be headed and made that decision on the best available input.
An issue all of us are facing right now is, where are interest rates headed? And given that rates have been at historic lows, the question is, when will rates be moving up and by how much?
If we look at the Bloomberg survey of 59 economists’ forecasts from May 10, 2012, we see the forecasted yields for second-quarter 2013 for the 10-year Treasury note, ranged from a high of 4.43% to a low of 2.00%, with an average of 2.82%.
Conversely, if we look at the prior year Bloomberg survey of 61 economists’ forecasts from May 13, 2011, we see the forecasted yields for second-quarter 2012 for the 10-year Treasury note, ranged from a high of 5.50% to a low of 3.25%, with an average of 4.16%.
On June 5, 2012, the actual yield for the 10-year Treasury was 1.54%.
Apparently, the old joke that “economists have correctly predicted 9 out of the last 5 recessions” is being kind. However, our intent here is not to question the ability of economists or credit union managers to correctly foresee the future, but rather, to stress that we cannot let ourselves be overwhelmed with volumes of data and then try to determine the perfect answer. Or, at the other end of a course of action, simply throw darts at a dart board to make management decisions.
We must be able to summarize the situation and extract a few key points that will aid in our process as it applies to the credit union and take a stand. Being a financial adviser for more than 25 years, a circumstance that I have experienced countless times during that period is a credit union manager who is unwilling to invest funds at current two- to five-year coupons in the belief that interest rates will soon be rising. Instead, those funds are being held as cash earning, for all intents and purposes, zero percent. They are waiting for something to happen.
We know we cannot accurately predict what five-year yields will be next year, or the year after, but we do know if we hold our liquid funds in cash for a year, then decide to invest, future rates would have to rise significantly above current levels to generate comparable income.
Let’s look at a very simple example, such as investing $100,000 with interest payable at maturity. Suppose the current five-year rate was 2.00%, but a manager ended up keeping the credit union’s liquid funds in cash for a year and then invested them. In order to realize similar returns in the five years ($100,000 X 2.00% @ 5 years or $10,000), the four-year rate next year would have to rise to 2.50% ($0 for 1 year + $100,000 X 2.50% @ 4 years, or $10,000). Where do you imagine the five-year rate would have to be in this case?
The bottom line is, those funds earning zero percent were doing neither the credit union nor its members any good. And the cost of waiting may have led to missed opportunities.
While the scenario I used involves investments, this call for action can be applied to other areas of your responsibility. Such as properly pricing loans (not too low) or shares (not too high) at rates that might put the credit union at risk just to match the competition, and perhaps being penny-wise and pound-foolish with employee compensation or marketing dollars or systems upgrades and so forth.
In this competitive environment, we need to prudently generate additional income, and that requires forward thinkers to act on those new ideas. And our actions should not be reactions but carefully thought-out plans.
Winston Churchill once said, “The maxim ‘nothing but perfection’ may be spelled ‘paralysis.’” We can’t always be expected to make the perfect decision, since we don’t have perfect information. But as managers, we must act as the leaders we are and take a stand.
Gary Tantleff is managing director-investments of the credit union advisory group at UBS.
Contact 877-269-1776 or firstname.lastname@example.org.