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With the fixed-income market pricing for multiple rate cuts in 2019, some of the credit union investors we speak with each day express a need for specific investments or strategies that perform well in a falling rate environment. While this question may make sense on the surface, your credit union’s overall investment process is what’s most critical in this — or any — interest rate environment.

Focus on the Process

In our experience working directly with several hundred financial institution clients and managing the Trust for Credit Unions portfolios, investment 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 change 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 thorough portfolio. 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. 

The investment portfolio serves an important role within a credit union’s overall balance sheet management process. Regardless of the portfolio’s specific objective (liquidity, income, etc.), the ultimate goal should be to maximize return per unit of risk taken. 

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