Short-term products reign, investment wish list revealed, 2Q of 2002 should be `robust,' NAFCU reports

ARLINGTON, Va. – Credit unions continue to have shorter investment maturities as liquidity swells and hints of another Fed rate cut looms, according to NAFCU’s latest findings. More than 55% of credit unions recently surveyed by NAFCU indicated that the maturity of their investment portfolios had shortened during the third quarter compared to last year. Longer maturities were seen by 19% of credit unions and 26% indicated that their maturity structure had not changed. Overnight investments saw increases by 54% of credit unions while 21% decreased their levels with most shuttled investments into corporate credit unions followed by Federal Reserve Banks (18%) and commercial banks (10%). Indeed, corporates continue to be the mainstay for many with 52% saying excess liquidity is the primary motivator for parking investments there. More than 31% sited higher returns as the main reason they turned to corporates. Still, just over 19% surveyed placed overnight investments in a combination of broker money market funds, a Federal Home Loan Bank and overnight repurchase agreements. Return on investments (ROI) continued to dip for 90% of credit unions in the third quarter with 5% reporting their ROI being higher and 5 percent remaining the same. In response to NCUA’s latest recommendations on expanded investment authorities, most credits unions surveyed would like to see corporate bonds/paper (55%), asset-backed securities (15%), repurchase agreement or reverse repurchase agreements (10%) and commercial real estate (10%). The remaining 10% of credit union responses were evenly divided between corporate debentures and derivatives. Meanwhile, the next two quarters may continue to be negatively impacted by the Sept. 11 terrorist attacks, NAFCU reports. But while the economy contracted during the third quarter by a revised 1.1%, and it is likely to weaken even further during the fourth quarter, the second quarter of 2002 may see some recovery. “When the economy does rebound, however, it should be at a relatively robust rate due to the expected government spending increase, the large amount of liquidity in the financial system, and likelihood that consumer spending will continue due to income gains, and the attractive interest rate environment,” NAFCU reported. “As a result, the economy is expected to expand in the 3.5 to 4.0% range over the second half of 2002.” The September consumer installment credit outstanding grew at a 2.5% annualized rate with credit unions declining to $185.7 billion, or 11.6% of the total consumer installment credit market. Outstanding credit union revolving and non-revolving credit levels in September were $21.8 and $163.9 billion respectively. At the end of September, credit unions maintained an 18.3% share of the non-revolving market. “The pace of consumption appears to be slowing in line with the high levels of personal debt and the continued economic uncertainty,” NAFCU reported. “Overall, credit union consumer credit expansion is expected to follow a moderately slower growth trajectory during the fourth quarter.” – [email protected]