Several days ago, NCUA posted the August financial results for the NCUSIF.
The good news is that the fund continues to show positive net income. For the first 8 months the year-to-date net is $122.2 million versus $45.4 for 2020.
However, only 13% of the fund’s $19.2 billion portfolio matures in less than one year.
In contrast, at June 30 credit unions reported 53% of their total investments were under one year. Of that amount over half, or 38% of all investments were in cash and overnights.
Both credit unions and NCUA have access to the same economic forecasts. Why is there such a dramatic difference in how investments are being positioned in this part of the rate cycle?
At the September board meeting CFO Schied promised to publish the NCUSIF’s investment policy in response to a question from a board member. The $1.2 billion reported in new August investments shows why this transparency is so urgent.
The most important monthly decisions by the fund are selecting investment maturities. The board and credit unions should know the assumptions committee members used when making these decisions.
The NCUSIF’s August Investments
As listed in the NCUSIF financial report:
8/16/21 T – Note 600,000,000 $ 8/15/2028 1.01%
8/26/21 T – Note 100,000,000 $ 8/15/2026 0.84%
8/26/21 T – Note 100,000,000 $ 8/15/2027 0.97%
8/26/21 T – Note 100,000,000 $ 8/15/2028 1.11%
8/26/21 T – Note 100,000,000 $ 8/15/2025 0.66%
8/26/21 T – Note 100,000,000 $ 8/15/2023 0.22%
8/26/21 T – Note 100,000,000 $ 8/15/2024 0.45%
I calculate an average weighted life of 5.7 years and a portfolio yield at .943% for these seven investments.
The critical question is what were the committee’s assumptions that caused them to lock up $1.2 billion for 5.7 years at a yield under 1%. These actions also reduced the overnight account of over $1.0 billion in June to just $230 million in August. It lengthened the portfolio’s average maturity by over 100 days.
The decisions show a seeming absence of any market awareness. Two investments have the same seven-year final maturity. However between the August 16, $600 million first note purchase, and the August 26 $100 million second note at exactly the same maturity, the yield rose 10 basis points!
This 10 basis point lower yield on the first $600 million will cost the fund and credit unions $6 million per year for seven years, or a total of $42 million over the life of the note. How did the committee make such an obviously untimely decision? Why has the committee continued to invest further out the yield curve when the consensus of most economists is that rates will be rising?
Shouldn’t the fund instead be rolling over these notes in 13 week, 6 month or one year Treasury bills yielding .05% to .15% in order to reinvest these funds as the markets move? For example the two year treasury bill has more than doubled in yield from the .22% return NCUA received in August.
I know of no credit union that would have made these investments with this average maturity and this yield with member funds. But that is what the committee did.
At the markets close today, the seven-year treasury note yielded 1.414% and has traded as high as 1.5%.
If the $600 million had yielded 50 basis points higher, this would generate $210 million over next seven years for the NCUSIF, or more than a full year’s operating expense.
For the quarter the major topic on the economy has been inflation. Is it transient due to temporary structural issues or shooting way beyond the Fed’s 2% target?
The economy’s continued supply shortages are now estimated to extend into mid 2022. Today the Fed will release its interest rate and monetary policy steps going forward. The tapering of bond purchases is expected and many forecasters foresee a Fed rate increase sometime in 2022.
Unfortunately recent NCUSIF investments will be a drag on its revenue for years to come. Continuing to invest in a period of historically low interest rates using the same ladder approach as in years of more normal rates makes no sense. These unusual investment decisions hurt credit unions and their members by causing revenue shortfalls for the fund.
The NCUSIF’s incremental investments should instead be rolled over in very short maturities and then re-invested as rates move into ranges consistent with the yield requirements for the NCUSIF’s operations.
The investment committee is presumably the same senior NCUA officials who oversee examination and supervision priorities. What would their response be to a credit union making these investment decisions?
Timely and transparent presentations of the cooperatively-owned NCUSIF financials is a commitment made by the agency when the 1% underwriting deposit was implemented. Fund results should be posted as soon as they are ready.
There needs to be a discussion in the published report of the investment actions, or none, made during the month. That is one critical way to build confidence in the management of this unique credit union resource. And to insure decisions are made in credit union members’ best interests.