Published in: CUNA Finance Council

A more dovish tone from the Fed, coupled with lower global growth expectations in 2019, have led the fixed-income market to price for rate cuts within the next 12 months. During this period, some credit union investors have expressed a need for specific investments or strategies that perform well in a falling-rate environment.

Managing at the Balance Sheet Level

First and foremost, credit union managers are better served managing interest-rate risk at the balance-sheet level rather than through individual investment decisions.  If, for example, model results show falling rates having a more detrimental impact on an institution’s value than desired, increasing overall asset duration and/or purchasing instruments such as interest-rate floors are two ways to mitigate the interest-rate risk associated with said scenario. Doing so would more effectively align the duration mismatch between assets and liabilities if so desired.

Although the outlook may have changed regarding the direction of rates, ALM First’s investment process remains constant. A well-thought-out investment philosophy and disciplined investment strategy can assist your credit union in creating a portfolio that remains sound – in any rate environment. By creating a sound strategy and framework, investment decisions become independent of interest rate levels. That’s why we advise all of our credit union clients to focus on process, rather than simply considering individual investment options in the context of our outlook for rates.

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