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Investment strategies: Three tips for navigating your options right now

By Jeff Duesler, Senior Investment Services Representative

It’s no secret that the novel coronavirus has created unprecedented disruptions to the U.S. economy. These disruptions have greatly impacted the behavior of consumers, as well. The postponed tax season, CARES Act stimulus checks, and an increase in the overall savings rate have resulted in a lack of choices for consumers about where they should spend their money. This means that most credit unions are in the same boat right now: They have significant amounts of cash (more than they expected) along with a blurred picture of how long this cash will stay at their institutions.

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With the precipitous drop of interest rates, and, subsequently, the rates earned on this cash, many credit unions have been asking our investment department what to do next. Based on what we’ve seen in the markets, as well as trends from other credit unions, today’s article offers a few thoughts and suggestions that may be helpful to adopt not only in this current pandemic situation but also as general practices from an investment standpoint.

Tip 1: Devote time and resources to areas other than security selection.

First, it’s important to remember that every credit union is different from a balance-sheet perspective. Each credit union has a pretty good roadmap for how they want to manage their own balance sheet and how their balance sheet reacts to different situations. This strategy is established through an asset liability management plan and the models that go along with executing and developing this plan.

That being said, while we are in this unique pandemic situation, time and resources devoted to a deeper dive into how cash levels might react when the economy reopens, and setting or resetting a target liquidity level (the basic rule of thumb is between 5%-10%), will be more productive than time devoted to security selection. While all credit unions are not in identical situations, if data is available and the membership profile hasn’t changed drastically, looking at how member balances “acted” in the months following September 11, 2001, might be a good place to start. Whichever way this analysis is done, it's important to start here. If your credit union is far above this target liquidity level, then other options can be selected to get there, including the following:

  • Utilizing loan specials if the risk budget is available.
  • Dispatching more cash to the investment ladder.
  • Adjusting internal rates to push deposits out the door.

Tip 2: Stick to the current playbook but consider some “half time” adjustments.

I’m a big football fan, so sports metaphors come easily to me. For example, coaches create a game plan but will then tweak that game plan, depending on what the other team is doing. Or, sometimes you’ll hear that an offense is “taking what a defense gives them.” This doesn’t mean the overall game plan or the coach’s philosophy has changed; it has just been tweaked. The same can be said for investing in the market: Despite the precipitous drop in interest rates, the market is significantly different than the market credit unions got familiar with in the last few years. For a significant amount of time, the yield curve itself was very flat, and there wasn’t much motivation to leave cash in favor of longer-term investments without a significant yield pickup, no matter how tried and true the laddered approach to investing is.

Our investment department still recommends a laddered approach to investing. However, depending on your credit union’s balance sheet and risk tolerance, it might make sense to look out longer-term for the longest “rung” of the ladder to take advantage of the upward sloping yield curve. Along the Treasury curve, the area between five and seven years has the most value; thus, products like government agencies and certificates of deposit are going to react the same way. We certainly have seen credit unions employ this strategy already or preparing for it.

However, this decision is based on the risk tolerance of the credit union and the composition of its balance sheet and certainly should be employed as a strategy when considering the big picture, not simply because there is value.

Tip 3: Have a flexible portfolio.

Third, when possible, have a flexible portfolio when it comes to selecting investment products. Although regulations limit the investment choices that can go into the portfolio, those choices are broad enough to offer subtle differences. Of course, these choices can be limited to your credit union’s familiarity with and knowledge of a particular product; however, there are vast amounts of resources available to help educate and connect your credit union to the marketplace, including investment professionals at Corporate One who are happy to offer consultation.

For now, here is a brief description of where value exists within the marketplace:

  • Certificates of Deposit. Credit union and bank CDs have historically offered an attractive spread over U.S. Treasury and Government Agency securities, although the current situation that your credit union is likely in because of the pandemic-muted loan growth and high internal cash balances also exists in other credit unions and community financial institutions. This commonality has resulted in less new issuance, and a reset of rates and spreads over other investments, and, consequently, a lack of supply and choices, especially for credit unions who have a high concentration of CDs. But there is still value in this product, and CDs should be a consideration when developing a near-term, asset allocation strategy to execute the laddered approach.
  • Floating Rate Securities. Floating rate securities are tied to specific indexes at initiation and float or reset according to a set schedule. These can come in several different forms and are tied to different indexes. Floaters typically are suggested when there is an expectation in the near term for rates to rise, but these securities also are considered when cash rates are low because the investor is going a receive a set spread above a short-term rate. That spread doesn’t change, so even if the cash rate moves lower, that spread is still captured. Because of the daily-rate resets, this type of investment is said to be neutral in duration; it doesn’t have negative sensitivity to rate movements. These securities aren’t for everyone, but for larger credit unions, especially those that want to manage the overall duration of the portfolio and want to earn spread over cash rates, they make sense.
  • Pass-Through Mortgage Backed Securities. We’ve really seen an uptick in inquiries for these securities, especially in the latter part of May. Investors have been especially interested in 15-year collateral. If an investor is going to look at adding mortgages to the investment portfolio, the initial suggestion is to consider Pass-Through mortgages. These securities are amortizing, and the collateral is a pool (in this case) of 15-year mortgages. These securities offer an attractive yield compared to U.S. Treasuries. Some of the risks include pre-payment risk and extension risk, but keep in mind that these risks can be managed in many ways with these securities and are done during the evaluation stage. Our department is happy to assist your credit union in developing some things to look for or look out for.

Although the pandemic situation is definitely unprecedented and unexpected, like many situations in life, this too shall likely pass. I started my financial career with credit unions during the aftermath of the worst of the 2008 financial crisis. What I witnessed was an industry that was changing but hardly in flux. I saw individuals working together to gain market share when people had lost confidence in the large banks. It was also a time of transition for credit unions looking for additional options for investments while investment regulations within the corporate network and lower rates made it more difficult for corporates to maintain paying higher rates.

If your credit union would like to reevaluate and consider some other options for the investment portfolio, our department is here to help. You can reach us directly at 800/366-2677.


All securities are offered through Multi-Bank Securities, Inc. (MBS). The home office of MBS is located at 24280 Woodward Ave, Pleasant Ridge, MI 48069. MBS is registered with the Securities and Exchange Commission (SEC) as a broker-dealer under the Securities Exchange Act of 1934. Member of FINRA and SIPC. All investments carry risk; please speak with your representative to gain a full understanding of said risks. Securities offered by MBS are not insured by the FDIC or NCUSIF and may lose value. All opinions, prices and yields are subject to change without notice. Any reports listed are for informational purposes only. Under no circumstances should it be used or considered as an offer to sell or a solicitation to buy securities mentioned in it. No representation is made that reports are accurate or complete or that any returns indicated will be achieved. Any reports listed are prepared for general circulation and are circulated for general information only. Reports do not consider the specific investment objectives, financial situation and particular needs of any specific person or institution who may receive this report.