With so many credit unions experiencing significant loan growth combined with deposit outflow in 2022, there has been little need to purchase investments. For many, simply managing adequate liquidity levels was the priority. However, as lending has started to show signs of stabilizing or even slowing down, liquidity is starting to show signs of growth. Soon, CUs could find themselves in a position to consider investing again.
Not so fast …. We are in a much different interest rate situation than we were a year ago. Sure, investment yields look particularly good right now, especially in the one- to two- year range, but we have to acknowledge the current shape of our US Treasury yield curve.
While we continue to watch the economic impact of the 2022-2023 Fed tightening cycle unfold, we have already witnessed the impact on the US Treasury Curve: inversion. This means short-term interest rates are higher than longer-term interest rates. An inverted yield curve is not a natural shape. We should be compensated more in yield the farther out we go in maturity, not less! While we don’t have the space here to really get into the ramifications of an inverted curve, just know that historically, the curve will normalize when short-term interest rates move significantly lower.