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Yield Curve Shifts and Interest-rate Volatility Create Funding Opportunities
Advances and Letters of Credit

Mid- to long-term fixed-rate advances and convertibles offer potential advantages to shareholders.

June 2019 - Short-term interest rates have remained attractive for some time, and FHLBank Atlanta (Bank) shareholders have taken advantage of this stability by borrowing short term and rolling over advances as funding needs require. However, changes in the interest rate environment in 2019, including an inverting of the yield curve, have nudged rates on longer-term advances down, creating opportunities to extend funding out the curve.

Today, interest rates for one-year to three-year fixed-rate advances compare favorably to shorter-term maturities. Institutions looking to add new funding to the balance sheet or roll over existing short-term advances should take a closer look at the Bank’s Fixed Rate Credit (FRC) advance in the one- to three-year range.

Earlier this year, FHLBank Atlanta (Bank) discussed the benefits of extending fixed-rate advance maturities, showing the pricing convergence of three-month, one-year, and three-year FRC advances. This pricing trend has continued through late spring, and longer-term maturities now may provide even greater benefits to borrowers over short-term funding. Below, we explore opportunities with longer-term FRC advances and convertible advances in the current interest rate environment.

Opportunity: Longer-term Rates Continue to Decline 
When the Bank last visited the topic of three-month FRCs versus one-year and three-year maturities, rate differences between these structures were close to zero. Since late March, mid- to long-term FRC rates have fallen further, while the front end of the pricing curve has held steady. As of June 18, 2019, borrowing a one-year or three-year FRC instead of a three-month FRC produced a savings near 30 basis points (bps), making it less expensive to extend maturities on fixed-rate funding.

 FRC Advance Spread Changes - Six Months

Opportunity: Advances may be Cheaper than Other Funding Sources
The decline in pricing on one-year and longer maturities for FRC advances also provides potential advantages compared to other sources of fixed-rate funding in the market. Factoring in a potential Bank dividend on activity-based stock purchased with the borrowing of a new advance, the all-in cost of the advance may be less expensive than comparative options. Furthermore, short-term funding from other sources have moved more in line with advance pricing over the last two months.

FRC Rates vs. Average Rates for Other Market Funding

FRC Rates

Opportunity: Convertible Advances 

An additional opportunity created in the current yield environment, with heightened volatility, is attractive pricing on convertible advances. The convertible advance offers a discounted rate through the sale of options back to FHLBank Atlanta. The options give the Bank the right to call/cancel the advance at predetermined dates. Convertible advances are quoted based on a final term with a specified lockout period before the options start. For instance, a 10-year no call three-month Bermudan convertible advance has a 10-year term with quarterly call options starting after three months.

The table below shows that a 10-year no call three-month Bermudan convertible is priced at 1.10 percent as of June 19, 2019, with an expected life of 18 months. This compares to 2.37 percent for a three-month FRC advance and 2.05 percent for an 18-month FRC advance. Based on this example, the convertible advance provides substantial savings. It is important to understand the risks involved with a convertible advance, so please contact your FHLBank Atlanta relationship manager or the funding desk if this structure is of interest.

Convertible Advances 

To learn more about how your institution may benefit from these current funding opportunities, call your relationship manager or the funding desk at 1.800.536.9650.

The Federal Home Loan Bank of Atlanta is not a registered investment advisor. Nothing herein is an offer to sell or a solicitation of an offer to buy any securities or derivative products. You should consult your own legal, financial, and accounting advisors before entering into any transaction. Interest rates presented in this article are for illustrative purposes only. Dividends on FHLBank Atlanta capital stock are not guaranteed and are declared at the sole discretion of the Bank’s board of directors.

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