Second Quarter Credit Union Investment Trends: Securities Holdings Rise as CUs Put Cash to Work

Source: Callahan & Associates

The latent effects of three rounds of stimulus payments resulted in annual deposit growth of 14.9% in the second quarter of 2021. However, from the first quarter, equity balances increased by only 1, 1%, down significantly from quarterly growth of 8.3% a year ago, but nearly twice the average rate reported in the second quarter over the previous three years. With the slowdown and end of direct federal and state benefit payments in the second quarter, it is evident that members across the country are still carefully managing their finances and avoiding major purchases and investments. A new wave of COVID-related news is further clouding the outlook for economic recovery and more will be revealed in the coming months.

Markets widely interpreted highlights from June’s Federal Open Market Committee (FOMC) as more hawkish than previous meetings, including the shift in participants’ median forecasts for the federal funds rate (“dot plot”) ). The consensus shifted from the March meeting, where no rate hikes were expected until 2023, to 50 basis points of rate hikes by the end of 2023 at the June meeting. Additionally, pressure to scale back Fed asset purchases continues to mount as the FOMC navigates expectations for a future cut, with many market participants expecting a more concrete plan in the coming months. and conversations start and progress.

Decline in total investments

In the absence of additional stimulus and a slight increase in demand for loans, investment balances declined accordingly. On a quarterly basis, total investment fell 0.4% (-$2.9 billion) from March to June and totaled $699.9 billion at the end of the quarter. Contrary to recent trends and despite a twisted yield curve (yields on two- to five-year notes rise and longer-term yields fall after the June FOMC meeting), cash balances contracted by 11.1 % from March, evidence of active credit union involvement in making money work. Thus, investments in securities and certificates increased at a solid quarterly linked rate of 7.6%.

The quarterly change in industry net liquidity (change in equity balances minus change in loan balances) was negative for the first time since September 2019 as demand for loans, notably auto loans, picked up. magnitude. First mortgages again accounted for the lion’s share of loan portfolio growth, up 2.7% from March, but auto loans came in second with balances up 2 .1% over the quarter.

Government and agency holdings drive portfolio gains

Cash and investment balances fell $2.9 billion to end the quarter at $699.9 billion. The main driver of the net decline was an 11.1% reduction in cash balances at credit unions across the country, while securities and investments rose 7.6%. Credit unions deployed the majority of funds in federal agency MBS (56.7%) and non-MBS (14.9%) securities and US government bonds (19.5%). In total, credit unions reported $241.7 billion in day-to-day cash balances, including $184.2 billion at the Fed and $44.1 billion at corporate credit unions. Cash on deposit fell across all segments, with Fed and corporate credit union balances down 10.8% and 16.0% quarter over quarter, respectively.

Successful cash deployment strategies resulted in a reduction in cash as a percentage of total investments, falling to 38.3% of total balances in the second quarter. Prior to March 2020, when this metric peaked, the industry’s average cash allocation was 28.6% between 2016 and 2019.

With the exception of bank notes and cash, each major segment of the investment portfolio increased on a linked quarterly basis. US government bonds posted the largest percentage increase in the quarter, 19.6%, as many investors watched the curve when rates initially jumped in late winter and early spring. Mutual funds posted the second largest percentage gain, up 12.2%, thanks to a combination of inflows into traditional investments and executive benefits prefund accounts. The biggest gain in dollar terms was again federal agency MBS debt, which rose 8.9% (+$17.3 billion).

investment portfolio data pie chart Source: Callahan peer-to-peer analysis

Credit unions rework portfolios, add duration

Fixed income yields traded in a narrower range for most of the second quarter after the surge in yields in the first quarter outweighed the impact of spread tightening for most of the following period. The Fed’s June 16 FOMC meeting changed the math for many as the quarter drew to a close. The hawkish sentiment in the meeting notes, particularly the timing of a rate hike, pushed forward expectations for price revisions, causing the yield curve to twist around the five-year mark. Yields in the two- to five-year maturity range rose while longer-term yields fell. The excess liquidity returned by the Fed’s balance sheet and US fiscal policy, combined with a reduced reserve of investable assets, pushed short-term rates and money market rates to historic lows. The Fed’s technical adjustments to the IOER and the Inverse Repurchase Facility Offer Rate (both increased by 0.05% at the June meeting) should ease some of the downward pressure on stocks. rate at the front end of the curve, but this is not a long-term solution as the imbalance between supply and demand remains a problem, among other challenges.

At credit unions, lower liquidity and increased investment activity led to longer maturities of investment portfolios during the second quarter. Investments continue to target the belly of the curve – three to seven years – where yield spreads were widest. Each securities maturity segment increased from the first quarter. The strongest percentage growth was seen in investments maturing in three to five years. This segment increased $17.8 billion, or 20.0%, from March and accounted for 58.2% of quarterly growth in the investment balance. Similarly, investments maturing in 5 to 10 years increased by 10.2% during the quarter, contributing 29.1% to the portfolio’s growth.

Source: Callahan peer-to-peer analysis

Sam Taft is Assistant Vice President, Business Development for Callahan Financial Services, distributor of Trust for Credit Unions, in Washington, D.C.

Sam Taft