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Investment Strategies: Navigating the current investment climate

For more information on the current economic climate, including more details on investment options, view the on-demand version of our recent Quarterly Economic Update Webinar, which aired on March 18.

Jeff Duesler, Senior Investment Services Representative

It’s not surprising that low short-term interest rates and higher-than-normal cash balances have led investors to pivot to other investment options. While this might be difficult if your strategy is to stay in cash, you can still get returns on longer-term investments. Today’s article will discuss some of the good investment options still out there, suggest helpful investment strategies, and answer several key questions, such as the following:

  • What is the difference between this situation and the Financial Crisis of 2008?
  • What investment vehicles are credit unions asking about?
  • Why are yields on CDs so low right now?
  • What strategies should I consider if I want to restructure my investment portfolio?
  • What’s the best way to navigate the current low-rate market?


In the past year, government lockdowns and stimulus payments led to higher-than-average personal savings rates, which led to higher cash balances at credit unions. This produced two major concerns: how long this influx of cash would last and how the money should be appropriately dispatched.

What is the difference between this current situation and the Financial Crisis of 2008?

The Financial Crisis of thirteen years ago was a liquidity crisis. Rather than the glut of deposits we’re currently experiencing, financial institutions back then needed to shore up liquidity and, therefore, used programs like non-member/non-retail CDs in order to bring in liquidity and demonstrate liquidity sources. Overall, rates have been low, but because of adequate supply, investors were able to see CD rates that were at (or, in most time periods, exceeded) that of U.S. Treasuries and other government securities. Credit unions of all sizes utilized the CD market to execute their investment plans. With the safety and soundness of government backed insurance, CDs were the logical choice.

Online banks and credit-card banks continued to see the value of using these programs for funding, and they benefited from the recovery. Community banks and credit unions also took advantage of low deposit rates and used these programs to help keep loan growth going. The result was an adequate supply of issuers to keep up with demand, causing rates to stay above other investments, like treasuries with similar risk profiles.

The coronavirus pandemic has produced very different results. Banks and credit unions are all in the same boat for the most part: flush with deposits. There is no need to seek out deposits/liquidity from outside sources. The modest amount of supply available has precipitously lowered rates on CDs, coupled with a very robust amount of investor demand and the rates required to “clear the market” (to raise the amount of funds you aim to bring in) have gone down significantly.

What investment vehicles are credit unions asking about?

While not everyone has needed to pivot into different investment types (many of you have been using a variety of investment types for a long time), investors who have relied on CDs for lengthy periods of time HAVE had to look at other investment vehicles. Some people might be coming back to bonds after a hiatus; others have chosen bonds for the first time.

At Corporate One, our investment representatives have recently had the most additional inquiries for mortgage-backed securities, especially in 15yr and 20yr mortgage pools. And there has certainly been an increase in callable agency interest, U.S. Treasury notes, and floating-rate notes. All of these have merits. Let’s briefly review each one:

  • Pass-throughs or mortgage-backed securities allow investors to receive cashflows monthly of both interest and principal. The idea is that this principal can be reinvested at current rates. (or loaned out). Pass throughs also create duration extensions that some ALM programs suggest. Because they have a unique set of risks, namely in extension and prepayment risks, these securities will usually have yields that are higher than other investments with similar terms. As an example: 15yr issues with 1% coupons were trading at a discount this week and have an average life of just over 5yrs and a yield around 1.00. These can trade at a discount premium or at par.
  • Callable agencies have dominated the new issue government agency market. We curate our daily offerings to present a cross section of what is available in the market, including new issues and secondary callable agencies. Our offerings are representative of the inquiry and the buying we see from our credit unions. While there is that prepayment risk in the form of a call, these do not carry the same “double-sided risk” that pass-through securities carry. They also don’t provide the same cash flows; investors receive interest semiannually and get principal back on maturity date. Because the investor is compensated in yield for giving the issuer the right to call the bond prior to maturity, these should have higher rates than corresponding agency bullet securities and U.S. treasuries. Callable investors benefit from a stable to rising-rate environment. People might think the opposite is true, but it really isn’t. When a bond gets called, it is because the issuer can “refinance” the debt at a lower rate, so there is an economic reason to call it.
  • Floating-rate securities (particularly in the floating rate portion of a Freddie MAC K commercial mortgage deal) float either at LIBOR or the secured overnight funding rate or SOFR. These securities are highly sought after right now. The purpose of buying floating-rate securities is to benefit from rising rates in the future.

What strategies should I consider if I want to restructure my investment portfolio?

Laddering is the tried-and-true method of setting up a portfolio. The process is quite simple: you decide the final maturity that your credit union is comfortable with, and then every month or every quarter, you do the same thing without much deviation.

For example, let’s say I start in January with a 5yr ladder that I am going to invest $1 million in every month. Every month, I am going to buy the best rate available for five years. I might select different asset types (i.e., a treasury instead of a callable), but I am going to maintain the strategy no matter what the market does. If rates are up, I invest $1 million, and if rates are down, I still invest $1 million. This is like dollar-cost averaging in stock or mutual fund investing.

Another strategy to consider in the current environment is the barbell structure, which is relevant right now because the yield curve is steep, and the expectation is that, at some point, rates will rise. The barbell structure allocates a position in cash and a longer-term position or positions. At the same time, you ignore the rates in the middle. This keeps cash available if and when rates go up. This cash can be reinvested, and the investments on the longer end will benefit as they “roll down the curve” closer to maturity. Because of the higher coupon/rate earned, as it moves closer to maturity, the investment looks good compared to other investments in that term. For example, a 5-year bond purchased at 1.00% becomes a 3-year maturity after two years if 3-year rates are .80% (1.00% looks good on a relative basis).

What’s the best way to navigate the current low-rate market?

One way to structure a portfolio right now is to include a mix of mortgage-backed securities, floating-rate securities, and callable bonds (beginning at the 3.5yr mark, which is when the yield curve starts to steepen). But, of course, it’s important to keep in mind that each credit union is unique. If your credit union can portfolio good longer-term mortgage loans, for example, then take the risk with members rather than with the agencies.

For more information on educational and informational resources on mortgage-backed securities and/or samples of investment policies, feel free to reach out to one of our senior investment services representatives at 800/366-2677. We are happy to help and offer consultation on the right investments for your credit union.