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Record Low 10-Year Treasury Rates and Net Interest Margin

October 20, 2011

On September 22nd, the 10-year Treasury Rate touched another historic low with a yield close to 1.7%.  This is a critical measure, as many credit union assets are priced off of the longer end of the yield curve.  There are many factors contributing to the low yield, including:

  • The Fed’s decision to sell some shorter-term debt and buy longer-term debt
  • The weak economy
  • The continued flight to safety (American debt looks relatively safe on a global scale)
  • The Fed’s stated intention to keep short-term rates low into the middle of 2013

So what does this all mean to a credit union’s net interest margin? All else being equal, credit union loan and investment yields will continue to decline while rates are low and the economy flounders.  Additionally, the ability to maintain the net interest margin becomes increasingly unlikely the longer we are in this low rate environment.  Deposit rates will hit a “floor” at some point.  Even if a credit union has room to lower deposit rates—and thus minimize the loss of asset yield today—that credit union will, by default, still be adding interest rate risk to the balance sheet.  Additionally, most credit union assets are fixed rate, and these low-yielding, fixed-rate assets will likely stay on the books for a while.  As a result of all these factors, credit union margins will be further squeezed and the potential for interest rate risk will increase.

Does your credit union have the ability to absorb more interest rate risk going forward?  Can your institution remain profitable 12 months from now if current trends continue? Now is a good time to try and figure this out, and take mitigating actions if deemed necessary.

Source: US 10-yr Treasury yield falls to lowest on record, The Associated Press, 9/9/11

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