Let's go back to that NCUSIF investment ladder that we discussed in Part 9 [here's the link] and Part 10 [here's the link]. As we know, the NCUSIF investment ladder has a 10 year time horizon, is invested in treasury bonds, with equal amounts of the $13 billion portfolio (@ $1.3 billion) invested on each yearly "step". We also know that NCUA reinvests the maturing "1 yr step" in 10 year treasury bonds to maintain "the ladder" - that's why the NCUA "investment birthers" bought $800 million in long-term treasuries over the last 90 days!
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| Yikes! This sounds scary... |
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| Looking "backwards"... |
Here's an example. If you bought a 10 year t-bond ten years ago, it would be in your 1 year step now, about to mature - right? Your 2 year step would reflect the 10 year t-bond rate nine years ago, your 3 year step would reflect the 10 year t-bond eight years ago, etc... the 10 year step would reflect the 10 year t-bond last year.... go slow, don't give up, read it again!
Here are your 10 year t-bond rates over the last 10 years (at 12/1/20xx or the nearest date to 12/1) [here's your link if you'd like to validate]:
12/2006 4.43%
12/2007 3.97%
12/2008 2.72%
12/2009 3.28%
12/2010 2.97%
12/2011 2.11%
12/2012 1.62%
12/2013 2.81%
12/2014 2.22%
12/2015 2.15%
Let's convert them into an NCUSIF investment ladder:
1yr 2yr 3yr 4yr 5yr 6yr 7yr 8yr 9yr 10yr
4.43% 3.97% 2.72% 3.28% 2.97% 2.11% 1.62% 2.81% 2.22% 2.15%
This example simply shows you what the approximate yields would be in our retrospective NCUSIF ladder. Of course this is not the "real", current NCUSIF ladder, but it does provide the opportunity for you to think about some questions... BTW the current 12/2016 ten year rate is 2.45% [that's why one might complain about NCUA's recent $800 million in purchases at @1.70%!!!]
TEST TIME !
1) Over the next few years will the maturing steps (say "steps" 1 & 2) be reinvested at rates above or below the rates on the maturing investments? [Hint: the "maturing rates" are 4.43% and 3.97%]2) Given your answer in #1 will the average yield on the NCUSIF portfolio go up/down over the next few years? [Hint: current portfolio yield is 1.84%]
3) At current market rates how long will the recent $800 million NCUSIF investments "penalize" the earnings of the Fund? [Hint: they were 10 year investments]
4) If your answer to #2 was that the overall portfolio yield will go down over the next few years [Hint: Mr. Fazio forecasts 1.78% in 2017, 1.75% in 2018] and since the NCUA budget is forecast to increase by at least 4% each year [Also Mr. Fazio's forecast] ... how will the NCUA "make up" for the decline in earnings (... and the drop in the NCUSIF "1.30% equity ratio")?
ISN'T IT TIME TO "ACT"?
ACCOUNTABILITY - COMPETENCY - TRANSPARENCY
[Going to leave a $100 million offer "on the table"?]
2 comments:
Been rightfully accused of being in the weeds... sorry... but it's important that CUs understand how their Fund is being (mis)managed... and that it will cost CUs $millions shortly.
Here are your answers to the 4 questions:
1. No one expects 10 yr rates to rise to @4% in next 2 years, so the steps should be reinvested at lower rates
2. Portfolio yield should decline as Mr. Fazio forecasts!
3. Your CU will be penalized for the next 10 years by the $800 million in low rate 10 yr bond NCUA has just purchased.
4. Your credit union will be assessed for the Fund shortfall.
Jim -- The devil is always in the details. I appreciate you going into the weeds to explain all of this. It might inspire a few who don't understand how it works to take action now that you have explained it so clearly. You are Warren Buffet"esque" in your ability to make the complex, simple.
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