Short-Term Ladders and LIBOR FRAPs Are Keys to Success for CUs Now

Today’s investors are caught in a battle between rising inflation and a slowing economy, translating into a debate over whether interest rates will be moving lower or higher in the near future. The variables continue to change daily, but one factor has been constant: the rising price of oil. Oil reached a record high price of $138 a barrel, which soon translated into a national average of $4 a gallon for gasoline. Will this price increase continue to create inflation problems or will it translate into a reduction in consumer spending altogether?

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.