Despite directives, cash as a percentage of total investments increased in the final three months of the year to 40.5% of total balances, the second highest level on record, which was set in the second quarter at 40.6%. Beyond cash, nearly every other segment of the investment portfolio expanded on a linked quarter basis. The largest gain was seen in Federal agency debt, with MBS investments expanding 7.6% ($11.9 billion) and non-MBS securities growing 6.7% ($3.8 billion). Mutual fund investments posted the largest percentage increase in the quarter, growing 18.1%, due to rising portfolio valuations throughout the fall and increased credit union participation.

Investment Maturity: CUs Target Longer Investments While Cash Allocations Rise

Maturities of investment portfolios at U.S. credit unions lengthened in the fourth quarter of 2020 despite a 14.9% quarterly increase in cash balances as investors increasingly looked to longer securities to lift slumping investment yields. Every segment except for securities maturing in one to three years expanded from the third quarter. Outside of cash, the largest growth in percentage terms and balances was seen in investments maturing in five to 10 years, rising $9.1 billion, or 20.3%, from September. On an annual basis, much of the lengthening of the industry portfolio came as credit unions allocated a relatively larger share of new investments to securities maturing in more than five years, collectively expanding 82.4% year-over-year.

Investment composition by maturity chart

Yield on Investments: Excess Cash and Portfolio Reinvestment Weighs on Earnings

The average yield on investments declined 9 basis points from the third quarter, falling to 1.35% at year-end, in line with levels not seen since December 2016. Although credit unions reported modest growth in non-cash investments and a slight lengthening in average life, the combination of declining reinvestment rates and the 40.5% industry cash allocation offset the marginal returns from the added duration, pushing yields lower. From a portfolio earnings perspective, investment income in the fourth quarter totaled $1.5 billion, up 0.3% from the third quarter, but down 24.7% year-over-year. Looking ahead, investors are increasingly looking to put excess cash to work in the new year. In early March, the prospect and discussion of another round of government stimulus shifted to not a question of if, but rather when and how large direct payments would be to consumers. In the short-term, given the mismatch in treasury issuance and liquidity supply, another influx of cash into member accounts – and the banking system more broadly – will likely further stress the supply and demand dynamic on the front-end of the curve, pushing yields and earnings lower.

Instant Insights /

Q4 Credit Union Investment Trends: Investment Balances Surpass $600 Billion, Cash Rises 98.2%

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