Observations On A Steep Yield Curve
February 19, 2010
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
- 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.