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Advantages of Longer-Term Advance Funding in the Current Market

June 6, 2017 - Over the last 18 months, the extended low interest-rate environment and steep yield curve have driven demand for short-term fixed and adjustable-rate advance borrowings from FHLBank Atlanta shareholders. However, current market movements may point to a shift in the rate environment and warrant a closer look at longer-term maturities for advances.

In recent weeks, the yield curve flattened due to a rally in the long end of the curve and higher short-term interest rates. Markets in mid May saw the spread between two-year and 10-year Treasuries converge to the narrowest level since just before the November 8 presidential election. Furthermore, higher short-term rates may be on the horizon, as Federal Reserve officials indicated at the May Federal Open Market Committee meeting that it would “soon be appropriate” to tighten monetary policy. Wall Street odds for a June increase in the federal funds target rate are around 80 percent1.

Funding Options for the Flatter Yield Curve

With the flatter yield curve, the interest-rate premium for borrowing longer-term FHLBank Atlanta funding compared to short-term funding has declined. Depending on an institution’s balance sheet, extending liabilities by locking in fixed-rate funding for 18 to 36 months could be an advantage.

For example, rate differentials between 3-month and 18-month Fixed Rate Credit (FRC) advances narrowed between late March and late May along with the flattening of the yield curve. The table below shows approximate rates for these two maturities as of May 30, 2017, and March 31, 2017. 

 

FRC Maturity May 30, 2017 March 31, 2017
3 months 1.14% 0.93%
18 months 1.47% 1.53%
Rate Difference 0.33% 0.60%

                                                                                                Rates are for illustrative purposes only  

                                                                      

FHLBank Atlanta’s current advance pricing special offers five basis points rate reductions on FRC and Adjustable Rate Credit (ARC) advances with maturities of 18 months to 36 months. Factoring in the special interest rate reduction, an 18-month FRC may be even more appealing as the spread to the 3-month rate further decreases to just 28 basis points. FRC structures within the 18 to 36 month maturity range may help shareholders manage the flatness of the yield curve and obtain protection if short-term rates continue to increase.

In addition, if shareholders consider themselves to be asset-sensitive or believe that interest rates will remain flat, they may benefit from longer-term floating-rate funding. Interest rate differences for short- and longer-term maturities of FHLBank Atlanta’s ARC advance have similarly narrowed in the last two months, as noted in the table below.

 

 

ARC Maturity
(indexed to 3-month LIBOR)
May 30, 2017 March 31, 2017
6 months 1.17178% 0.97956%
18 months 1.23178% 1.17956%
Rate Difference 0.06% 0.20%

                                                                                                Rates are for illustrative purposes only 


With the current advance pricing special, shareholders may be eligible to receive a five basis points reduction on an 18-month ARC advance resulting in sub-LIBOR funding. This reduction nearly eliminates the rate premium paid for an 18-month ARC compared to a 6-month ARC.

 

Common Uses and Benefits

 

FRC

ARC

Common Uses

Fund fixed-rate loans and investments, manage liquidity

Funding adjustable-rate loans, lines of credit, and investments

Benefits

Mitigate risk of holding long-term loans in portfolio

Manage interest-rate risk

Flexible and easy to explain to management, asset/liability committees, and the board of directors   

 

Contact Us

To discuss funding strategies for today’s interest-rate environment and take advantage of the limited-time FRC and ARC advance pricing special, contact your FHLBank Atlanta relationship manager or the Funding Desk at 1.800.536.9650, extension 8011.

Advance special pricing terms and conditions may apply. Advance applications must be received by 10:00 a.m. EDT on July 14, 2017. Funding for the pricing special is limited and may be depleted before July 14, 2017. 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.

Sources:
1Smialek, and Condon, Christopher. “Most Fed Officials Saw Tightening ‘Soon,’ Favored Unwind Plan.” Bloomberg L.P. Web. May 24, 2017.

Chappatta, Brian. “Fed's Rate-Hike Odds Tumble After Washington Chaos Hits Bond Market.” Bloomberg L.P. Web. May 17, 2017.

 

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