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How To Invest Now To Take Advantage Later

Today’s investors are caught in a battle between rising inflation and a slowing economy, translating into a debate over whether interest rates will be moving lower or higher in the near future. The variables continue to change daily, but one factor has been constant–the rising price of oil.

Oil has reached record high prices, which soon translated into a national average of $4 a gallon for gasoline. Will this price increase continue to create inflation problems, or will it translate into a reduction in consumer spending altogether?

With so many powerful forces at work in the marketplace, credit unions are not really in a position to influence the resolution of big picture economic problems; instead, portfolio managers are focused on the day-to-day concern of how to eke out the most income in this stagnant environment. Due to the build-up of excess liquidity over the spring, which has occurred in advance of seasonal loan demand, credit unions are trying to determine the best way to invest funds now, while preserving their opportunity to take advantage of higher rates expected later this year.

One game plan that is proving to be successful for Georgia Central’s member credit unions has been creating short-term ladders within one year. The goal is to beat the overnight share while assuring money is ready to be reinvested as rates begin to move higher over the coming months. As long as the Federal Reserve keeps the Fed Funds Target rate at 2.00%, share rates will be hard pressed to change.

Staying Ahead Of Overnights

Credit unions have been able to add 30 to 140 basis points to their portfolio yield, depending on maturity and investment choice. Some ladders are beginning as short as 60 days.

Corporate FRAPs (Floating Rate Asset Program) based off of LIBOR (London Interbank Offered Rate) provide a particularly attractive opportunity today–the spread between Fed Funds and LIBOR is historically wide, with LIBOR trading over 40 basis points higher. This additional rate difference makes the timing for LIBOR FRAPs optimal, which is something credit unions have recognized. Though Georgia Central has offered FRAPs for many years, the current market environment has created a marked increase in use of the vehicle. As the global financial markets continue to stabilize and the issues surrounding LIBOR rates come under control, we will begin to see the yield difference narrow – so the time to invest in FRAPs is now.

With analysts changing their interest rate forecasts weekly, the best strategy for credit unions now is to stay as much ahead of their overnight rates as possible while positioning themselves for the upcoming change in rates. Until loan demands appear again, credit unions can find a safe haven in short-term yields.

Sarina Freedland is Georgia Central’s Assistant Vice President of Investment Services. For info: www.gacentral.org/ or www/Investments.asp. (c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved. http://www.cujournal.com http://www.sourcemedia.com

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