By: Hafizan Hamzah | CUNA CouncilsÂ
Often, credit unions will accept credit risk in the loan portfolio but avoid it in the bond portfolio. But credit exposure in an investment portfolio opens up the possibility of increased returns, along with the opportunity to diversify risk in the portfolio overall. Similar to the process of loan underwriting, portfolio managers must carefully evaluate potential investments before adding them to the portfolio. After they have been added, regular portfolio management procedures should ensure that securities are monitored.
The Case for Credit
Past performance shows that credit-risky assets have some diversification benefit when combined with agency MBS. Exhibit 1 shows the two-year correlations of monthly returns. As the table illustrates, agency MBS have lower correlations with credit-risky assets than they do with Treasuries and agency bullets.