The Treasury yield curve is rarely as steep as it is today.  The spread between the 3-month and 10-year has recently exceeded 350 basis points.  In more certain times, steep yield curves are beneficial to credit unions because the rates paid on non-maturity deposits are influenced by the short end of the curve and the rates charged on many loans are influenced by the long end of the curve.

When managing risk, we suggest you consider what could happen if the yield curve environment:

• Remains steep
• Steepens
• Flattens by short-term rates increasing (as it did following the last recession)
• Flattens by long-term rates declining

As you consider these environments, be sure to reflect on how different yield curves might impact member behavior.  For example, a flatter yield curve could be accompanied by lower non-maturity deposit balances as the competition for deposits increases.  Loan demand could also be impacted depending on the reasons for different yield curves.

In 2009, we experienced an unprecedented level of government intervention in the mortgage market; and it is not over yet.  What happens when it is over?  The expected end of the new home buyer credit in 2009 no doubt greatly contributed to the 17% decline in home sales (Source:  Bloomberg News, U.S. Economy: Existing Home Sales Decline More Than Forecast, January 25, 2010).  Now that this credit has been extended to early summer, can we expect sales to return?  What about the 75% of mortgages that FNMA and FHLMC financed in 2009?  What about the $1.1 trillion MBS purchased by the Fed in 2009, a program that ends in March?  If this government support for the mortgage market were to end, what else could happen to the mortgage market beyond an increase in mortgage rates?

If you rely heavily on mortgage volumes, we recommend you test drive the potential impact to your business model of an end to government support of the housing market.  Questions to consider include:

• What could happen to mortgage rates?
• How might loan volumes change?
• What could be the impact to a strategy of originate and sell?
• What could happen to non-interest income?

Investing time to run through a test drive can help management better respond should this scenario unfold.