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Observations On A Steep Yield Curve

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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.

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The U.S. Mortgage Market: Government Support and Uncertainty

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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.

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Effective Project Management Can Improve The Bottom Line

Who doesn’t want to have the right things done, at the right time, within budget?  Nobody.  Yet, across all industries, up to 72% of projects fail (Source:  The Chaos Report, Project Management Institute, April 2009).  A poor project management process is the single largest reason for this high rate of failure, which costs money, wastes time and increases frustration.

In today’s chaotic environment, it is advantageous for management teams to focus on the key items in their control so they are better prepared to handle the blows from external forces that are likely to persist.  One of the key areas over which managements have most control is strategic allocation of human and financial resources (efficiencies and operating expenses).  This strategic allocation is critical to the success of daily operations as well as new projects.

Many credit unions are undertaking projects with the intent of bottom line improvement that are failing or adding to expenses due to lack of prioritization, proper scope and execution.  The following three actions can improve strategic allocation of human and financial resources, efficiencies, and employee, management and/or member satisfaction:

  1. Developing an effective, repeatable project management process.
  2. Dissecting key processes and implementing appropriate changes to create sustainable efficiencies.
  3. Creating a reliable process for CEOs and senior managements to use to successfully manage a portfolio of projects.

For a more detailed framework on how to achieve these actions and possibly an improved ROA, please refer to our recent c. notes articles:

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Big Questions For 2010

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2010 begins with an immense question attached to it:  Where will the economy go this year?  Confounding any sort of clear answer are the conflicting signs of continued recovery and renewed downturn that came with the close of 2009:

  • The housing market has seen home prices rise for the sixth straight month in October.  However, the recovery appears fragile as one-in-seven households are either in foreclosure or delinquent on payments, while almost one-in-four households are underwater (Real Estate Faces Tough Recovery Slog, WSJ, 1/4/2010)
  • Car sales surged at the end of the year to an annualized rate of 11 million, making December the second-best month of the year.  However, this was still far below the 16 million annualized rate seen as an indicator of a healthy auto industry (Late Surge in Car Sales Raises Hopes for 2010, WSJ, 1/4/2010)
  • The Dow Jones finished up 18.8%, however, unemployment remains around 10% and the Fed, concerned with the fragility of the recovery, continues to keep the Fed Funds rate at a record low of 0-25bps (Fed Will Hold Down Rates, Citing Tenuous Recovery, NY Times, 12/16/09)

It is fair to assume that 2010 will hold its fair share of surprises, opportunities and crises that will require tough decisions and quick, deliberate action on the part of credit unions.  One question credit unions are asking themselves right now is, Are we as prepared as we can be? Below is a brief list of questions to consider to help assess your preparedness for what promises to be an interesting year:

  • Have we thoroughly explored the impact of a further economic downturn on our business model and business plan?  A material recovery?
  • What is our short list (no more than five) of strategic initiatives that must be pursued regardless of the economy to better position the credit union for the long term?
  • Have we created and communicated detailed game plans and do we have a defined project control process to ensure that progress on these strategic initiatives will be accomplished in 2010?
  • Are our board and senior management aligned on the definition of success for 2010?
  • Given the level of uncertainty and the likelihood of “surprises,” have we blocked, in advance, regular time for key decision makers to discuss new issues and make decisions?

With answers to these questions, your credit union will be in a better position to make decisions and react to unforeseen events.  This is especially important, as the point at which you address a problem is directly related to the number of viable options you have for solving it…