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DALLAS – Southwest Corporate saw strong interest in special certificates last year, with fixed maturity bullets becoming the favored choice as ’04 went on. The $8 billion corporate expects that to continue in ’05. Southwest Corporate served up a record 108 special certificate offerings in 2004, up from 91 such offerings in 2003 and 50 in 2002. The structured certificates, with their potentially higher returns, were favored in 2003. But in 2004, credit union managers wanted more certain returns and started investing more into fixed-maturity, bullet instruments. The percentage of bullet-style certificate of deposits shot up from 38% in 2003 to approximately 54% in 2004. When combining investment in both structures and bullet instruments, Southwest Corporate issued a total of $2.8 billion in certificates of deposit in 2004, up from $2.6 billion in 2003. The shift of 2004 will likely continue into 2005, according to Cynthia Shi, CFA and Manager of Portfolio Management for Southwest Corporate. Part of the reason for the shift, Shi said, was because CUs started preparing for the liquidity runoff resulting from an improving economy. “Credit union managers stayed relatively short. There is not much yield pickup or flexibility when investing in structures with short maturities. So credit union managers opted for bullet investments.” Another reason for the shift may have been a result of the “callable” feature embedded in many of the structured CDs. The callable aspect can terminate the investment instrument if rates tumble. That happened with some frequency in 2003-thus making some investors a bit reluctant to try the structured certificates in 2004, despite the potential for higher returns. “I do think the trend for bullets will persist in early 2005 as there is expected to be lower volatility in the market, a flatter yield curve and continuing liquidity concerns. These factors might encourage CUs managers to stay relatively short,” Shi said. Shi said there are also structures that provide benefit to credit unions as the yield curve slopes upward. “CU might also want to look at the capped floaters (with or without call options). They look good as the curve continues to flatten and Treasuries look so rich,” she said. “I would want to encourage CUs, however, to re-evaluate their decision frequently – callables do perform better than bullets in a rising-rate environment, Shi said. “And that is what we are facing now.”

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