Posts

/by

Fed Indication on Bond Buying

On June 19, Chairman Ben Bernanke indicated that the Fed may slow its bond purchases later this year. Since that statement, the 10-year Treasury yield has increased 35bps from 2.20% on Tuesday, 6/18, to 2.55% on Wednesday, 6/26 (Treasury.gov), while the Dow Jones Industrial Average (DJIA) has dropped 408 points over the same period (Bloomberg.com). Keep in mind, the Fed only made a statement.

This raises some interesting questions for decision makers to consider, including:

If the rate increase is sustained…

  • How might this impact loan volumes in the short and intermediate term? Could volumes increase in the short-term for fear of loan rates increasing? What impact would it have on longer-term loan demand?
  • How might non-interest income be impacted?
  • If you were counting on your callable bonds to be called, and now they may not be called, should you hold them or fold them?
  • Could you experience another flight to safety if the stock market continues to be volatile?

Treasury rates could come back down and the stock market will hopefully “right” itself at some point. Nonetheless, decision makers should consider the impact to financial performance if current trends continue. Running through different “what-if” scenarios of how the institution would react and testing them in forecasting and risk models can help decision makers be better prepared.

/by

Long-term Rates And Mortgages

According to data provided by the U.S. Department of the Treasury, May saw both the lowest and highest 10-year Treasury yields of 2013.  On May 1st the 10-year constant maturity Treasury yield was 1.66%, the lowest level of the year.  On May 31st the 10-year closed at 2.16%, the highest level this year. Speculation about the Federal Reserve tapering its $85 billion monthly bond buying program is assumed to be responsible for the rise in yield.

As the 10-year Treasury yield increased so did mortgage rates. According to Freddie Mac’s Primary Mortgage Market Survey, the average 30-year fixed-rate mortgage was offered at 3.81% as of the May 30th survey compared to 3.35% in the May 2nd survey.

Is the May increase in yield an overreaction to market data (as some have suggested) that may reverse itself, or is it a sustainable increase?  For example, the median forecast of 75 economists and strategists surveyed by Bloomberg News put the 10-year yield at 2.20% by the end of the year.

If rates remain at these levels, or move higher, how might your credit union’s mortgage business be impacted?  According to a CNBC report, overall mortgage applications were down 8.8% for the week ending May 24th while mortgage applications specifically for refinancing fell 12.3%.  If mortgage originations and sales are helping your bottom line today “what iffing” lower volumes and income can help prepare board and management for potentially lower earnings in the future.  Discussions about ways to make up this income should also be taking place.  And, consider this:  the recent increase in rates appears to be driven by speculation about the Fed’s next move.  What might happen if they actually do pull back or completely stop buying bonds?

Sources: Treasuries Loss Is Biggest in 3 Years as Fed Considers Tapering, Bloomberg, 5/31/13
Refi Madness Is Finally Running Out of Steam, CNBC, 5/31/13