The unrealized effects of three rounds of stimulus payments resulted in an annual deposit growth of 14.9% in the second quarter of 2021. However, from the first quarter, stock balances increased by only 1.1. %, down significantly from quarterly growth of 8.3% a year ago, but almost double the average rate recorded in the second quarter over the previous three years. With the slowdown and the cessation of direct payments of federal and state benefits in the second quarter, it is evident that members across the country are still managing their finances prudently and avoiding large purchases and investments. A new wave of COVID-related news has further clouded the prospects for economic recovery and more will be revealed in the months to come.
Markets widely interpreted June’s Federal Open Market Committee (FOMC) highlights as more belligerent than previous meetings, including the change in participants’ median forecasts for the federal funds rate (“dot plot”). The consensus went 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, the pressure to deal with the Fed’s reduction in asset purchases continues to intensify as the FOMC navigates towards a future reduction, with many market participants expecting a more concrete plan in the months to come. coming and conversations begin and progress.
Decrease in total investments
In the absence of additional stimulus and a slight increase in loan demand, 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 crooked yield curve (yields on two to five year bonds rise and longer-term yields fall after the June FOMC meeting), cash balances contracted by 11.1 % from March, evidence of active participation of credit unions by putting money to work. As a result, investments in securities and certificates grew at a strong quarterly rate of 7.6%.
The quarterly change in net liquidity for the industry (change in equity balances minus change in loan balances) was negative for the first time since September 2019, as demand for loans, particularly vehicle loans, declined. gained momentum. First mortgages again accounted for the lion’s share of loan portfolio growth, up 2.7% from March, but auto loans trailed behind with balances up 2. 1% over the quarter.
Government and agency holdings drive portfolio earnings
Cash and investment balances decreased $ 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 of credit unions across the country, while securities and investments rose 7.6%. Credit unions deployed the majority of funds to 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 overnight cash balances, including $ 184.2 billion to the Fed and $ 44.1 billion to corporate credit unions. Cash on deposit fell across all segments, as Fed and corporate credit union balances fell 10.8% and 16.0% quarter over quarter, respectively.
Successful cash deployment strategies resulted in a reduction in cash flow 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 average cash allocation was 28.6% between 2016 and 2019.
With the exception of banknotes and cash, each major segment of the investment portfolio has grown on a related quarterly basis. U.S. government bonds posted the largest percentage increase in the quarter, 19.6%, as many investors looked at the curve when rates initially rose in late winter and early spring. . Mutual funds posted the second largest percentage gain, up 12.2%, thanks to a combination of entries into traditional investments and prefinance benefit accounts for executives. The biggest gain in dollars was again the MBS debt of federal agencies, up 8.9% (+ $ 17.3 billion).
Credit unions rework portfolios, add duration
Fixed income yields traded in a narrower range for most of the second quarter, after the rise in first quarter yields outweighed the impact of spread tightening over much of the period that regular. The Fed’s June 16 FOMC meeting changed the math for many as the quarter neared the end. The hawkish sentiment from the meeting notes, particularly the timing of a rate hike, pushed up price revision expectations, causing the yield curve to twist around the five-year mark. Yields in the two to five-year maturity range have increased while longer-term yields have fallen. The excess liquidity returned by the Fed’s balance sheet and US fiscal policy, combined with a shrinking pool of investable assets, pushed short-term rates and money market rates to all-time lows. The Fed’s technical adjustments to the IOER and the repo facility offer rate (both increased by 0.05% at the June meeting) should ease some of the downward pressure on rates at the end of the curve, but this is not a long-term solution as the supply / demand imbalance remains a problem, among other challenges.
In credit unions, a decline in cash holdings and a slight increase in investing activity resulted in longer maturities of investment portfolios in the second quarter. Investments continue to target the bottom of the curve – three to seven years – where the yield spreads were widest. Each securities maturity segment has increased since the first quarter. The strongest percentage growth was seen in investments with maturities of three to five years. This segment increased $ 17.8 billion, or 20.0%, from March and accounted for 58.2% of the quarterly growth in the investment balance. Likewise, investments with a maturity of five to 10 years increased 10.2% during the quarter, contributing 29.1% to portfolio growth.
Sam Taft is Assistant Vice President, Business Development for Callahan Financial Services, Distributor of Trust for Credit Unions, in Washington, DC