Q1 Investment Trends: Trends Turning in 2022

Source: Callahan peer-to-peer analysis

After three years of deposit growth outpacing loan growth, the trends reversed in the first quarter of 2022. As of March 31, credit union loan balances grew 11.7% annually, from 9.3 % for stocks. Major government relief programs appear to be in the rearview mirror and loan application patterns are pivoting towards the consumer lending space.

The long-awaited interest rate hikes materialized, with the Federal Reserve raising the federal funds rate by 25 basis points in March and another 50 basis points in May. Soaring consumer price inflation has forced a more hawkish response from the Fed than many expected just a few months ago. The Fed also stopped buying securities in March and aims to shrink its balance sheet by $9 trillion, expecting to let about $1 trillion sink in over the next year.

Total industry investment shows minimal increase in first quarter

Total investments held by credit unions increased just 0.3%, or $2.1 billion, over the past three months to a total outstanding of $723.4 billion at the end of of the quarter. This is the fourth consecutive quarter of quarterly growth below 2%. Cash balances, which have shrunk 2.6% since December, have been used to fund renewed demand for consumer loans as the economy continues to reopen and buyer confidence rises. Cash now makes up 34.8% of credit union investment portfolios, down 1.6 percentage points from three months ago, as rising yields made stocks attractive relative to low-yield cash. Government and agency securities were the preferred investment category, with balances up $10.7 billion, or 3.0%, from last quarter.

Credit union stocks rose $64.3 billion from last quarter, leading to a $17.5 billion increase in net cash. A strong quarter of lending – and a slower pace of consumer loan prepayments – drove the loan-to-unit ratio up to 70.2%. While this is a welcome sign for lending institutions, it remains well below the pre-pandemic industry peak of 84.5% in December 2018. Even with increased loan demand during of the past year, this key liquidity ratio has only increased by 1.5 percentage points since March 2021. The continued deceleration in equity growth will be a key element of the increased deployment of balance sheets, but new loans must also remain in long-term balance sheets. The average mortgage rate reaching 5% at the end of the quarter prompted credit unions to keep more mortgages on their balance sheets. First quarter mortgages sold in secondary markets fell during the quarter to $17.9 billion, about half the amount sold in the third quarter of 2020, when attractive prices prompted institutions to sell loans mortgages at higher rates.

Credit unions favor long-term securities

The Fed has become more hawkish in the first quarter of 2022 than it had been in 2021. The start of the yield curve was revised following comments from the Fed after its March meeting, bond yields of the Treasury at two and three years increasing by 93 and 91 basis points. , respectively. As for spreads, the 5y/30y and 5y/10y both reversed for the first time in over a decade, while the 2y/10y spread ended the quarter slightly positive.

Credit union portfolio managers reacted to these curve shifts by increasing their allocations to medium- and long-term investments. Securities maturing in 5 to 10 years have seen the biggest increase, rising 20.6% since December and 36.3% annually. This brought the total funds invested in this segment to $119.3 billion. Constituting 16.5% of the total investment mix, five- to 10-year durations are now neck and neck with three- to five-year securities as the largest non-cash portion of industry portfolios. Cash remains the largest portion at $251.0 billion – comprising 34.8% of total investments – but its dominance is diminishing. After record cash balance growth during the pandemic, cash was down 2.6% from the prior quarter and down 14.4% from a year ago. Overall, credit unions have moved away from low-yielding investments, seeking instead to invest more funds in medium- to long-term securities.

Source: Callahan peer-to-peer analysis

The industry gains two basis points

The average investment return increased two basis points quarter over quarter to 0.91%. This is the fourth consecutive increase on a quarterly basis. Year-over-year, investment returns rose eight basis points, moving away from the record low investment return of 0.83%. Yields fell throughout 2020 and early 2021 due to credit unions’ preference for low-interest liquid cash combined with rate cuts by the Fed to significantly reduce overall portfolio returns . Going forward, average investment returns are expected to continue to rebound as benchmark rates rise and co-ops continue to favor long-term investment options.

Source: Callahan peer-to-peer analysis
Jay Johnson Jay Johnson

Jay Johnson is president of Callahan Financial Services, distributor of the Trust for Credit Unions, in Washington, D.C.