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A New Fixed Income Landscape: Perspective On The 10-Year Treasury

As institutional investors continue to search for yield and the country analyzes the latest election results, credit unions should consider the evolution of the fixed income landscape for additional insight.

Elections and their outcomes very often generate a round of commentary comparing the current year’s results to past cycles. The analysis typically focuses on the candidates and their positions, the reasons for success or failure of a particular candidate, the sentiments of the electorate, and most importantly the impact on policies. For political pundits, the exercise is an attempt to provide perspective.

Credit unions can perform similar exercises to capture perspective regarding the fixed income landscape. An interesting examination might involve a historical look at the 10-Year Treasury note.

The 10-year benchmark rate has long been used by credit unions as a baseline to price deposits and assets for their members, as well as a key data point to consider when evaluating investments.

To stay within the election theme, let’s look back a couple of cycles to the 1980s and review data for the 10-Year Treasury.

The average yield and duration for the period of 1980-1989 was:

Average Yield

Average Duration
6.1 Years

The on-the-run 10-Year treasury as of November 2012 is:

Current Yield


Average Duration


Behind The Figures

As the data shows, the 10-year treasury today has a lower income, longer duration and thus offers less protection than it did in the 1980s. This type of fundamental change in the fixed income landscape has caused many investors to take another look at their portfolio composition and utilize short duration strategies in broader ways.

Credit unions, which are limited in terms of their investment portfolios, have begun experiencing this type of shift in portfolio construction firsthand. More assets have been shifted to short duration options.

As credit unions look more closely at their overall portfolios given the current fixed income landscape, the ability to select investment options with targeted durations could become a more important part of their overall asset liability and interest rate risk management processes.Allowing credit unions to gain exposure to certain types of asset classes without making a long-term investment may also help boost yields during a prolonged low-rate environment.

How Target Duration Portfolios Work

With a professionally managed portfolio, a specified duration can be targeted to help institutional investors structure their balance sheets. For example, The Trust for Credit Unions Ultra-Short Duration Portfoliotargets a duration of nine months and the TCU Short-Duration Portfolio targets a duration of two years, investing in different asset classes (agency notes/debentures and mortgage backed bonds, etc.) that are permissible investments for federal credit unions.

Unlike investments in individual securities, the TCU portfolios pool participating credit unions’ funds and actively manage a diversified portfolio. This approach can help minimize certain risks such as extension or call risk when compared with an individual security. Institutions can also gain exposure to different asset classes, without investing for the long-term. Shares of the portfolios may be purchased or redeemed at any time based on the credit union’s needs.

Options like these exist to help credit unions manage their investment portfolios and overall balance sheets through a wide variety of interest rate environments and changing investment landscapes. They can be used as part of an overall investment strategy or as a supplemental component, complementing other types of investments.

Want To Learn More?

The Trust for Credit Unions was created exclusively for credit unions and has managed billions of investment dollars for hundreds of institutions throughout its 25-year history.

TCU also provides ongoing education about the economy and institutional credit union investment options through online resources, live webinars and more. Interested credit unions are invited to register for our upcoming Investment Seminar on December 7, 2012 in New York City.

Contact us today at info@trustcu.com or 800-237-5678 to request a copy of the Trust for Credit Unions’ prospectus. You can also learn more about each of the portfolios online at www.trustcu.com.

The Trust for Credit Unions (TCU) is a family of institutional mutual funds offered exclusively to credit unions. Callahan Financial Services is a wholly-owned subsidiary of Callahan & Associate and is the distributor of the TCU mutual funds. Goldman Sachs Asset Management is the advisor of the TCU mutual funds. To obtain a prospectus which contains detailed fund information including investment policies, risk considerations, charges and expenses, call Callahan Financial Services, Inc. at 800-CFS-5678. Please read the prospectus carefully before investing or sending money. Units of the Trust portfolios are not endorsed by, insured by, obligations of, or otherwise supported by the U.S. Government, the NCUSIF, the NCUA or any other governmental agency. An investment in the portfolios involves risk including possible loss of principal.

This article is sponsored by a recognized solutions provider in the credit union industry. Callahan & Associates does not endorse vendors or the solutions they offer, and the views and opinions offered here might not reflect those of Callahan. If you are interested in contributing an article on CreditUnions.com, please contact the Callahan team at ads@creditunions.com or 1-800-446-7453.
May 30, 2014

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