Should Credit Unions Choose Variable Rate Securities in a Rising Rate Environment?

WASHINGTON – The market value on long-term fixed rate securities can depreciate quickly during a rising interest rate environment but is there an alternative for credit unions? Callahan & Associates, Inc. said in a rapidly rising rate environment, “the market value on long-term fixed rate securities can depreciate quickly and the bond markets are not a forgiving place for investors who find themselves long and wrong.” If variable rate securities are sought as relief, Callahan said credit unions should remember to define the attributes of the investment; list the pros and cons, risk and return, and evaluate within the context of the existing portfolio. “Each one of these rules requires different analytical techniques and as the complexity of the instruments expands, so does the analysis required to assess the instruments,” Callahan advised. “For example, in variable rate securities you come across a whole host of terms germane to this sector, like cap, floor and collar risk.”