One common refrain from depository members is that their interest-rate risk profile has shifted considerably over the last two years. Where they used to be asset sensitive, they are now liability sensitive due to asset extension and a shift in their deposit profile from non-maturity deposits to short-term certificates of deposits. Accordingly, when looking at income simulation results, many are positioned to experience continued margin and earnings pressure in the near term, followed by improving conditions over time. A visualization of the earnings at risk profile resembles a checkmark, as funding cost pressure ramps up in the near term before receding, and asset yields slowly but surely reprice higher.
A popular strategy for many FHLBank Boston members has been to incrementally increase the duration of their borrowings to counterbalance the aforementioned extension risk on the asset side of their balance sheet and contraction risk in their deposit portfolio. To the extent that capital levels and liquidity metrics afford flexibility, investment leverage may have relative appeal in the current environment. An approach that adds assets in the intermediate range (five to seven years) with slightly shorter funding (one to three years) provides interest-rate risk-neutral income in the near term while adding liability sensitivity in the long term. That profile balances the exposure mentioned above that many find themselves in now, needing earnings support in the present while being better equipped to handle a duration mismatch beyond year one or two.
Consider using a combination of Classic and HLB-Option Advances in a blended funding strategy. The table below uses four equal amounts, with a 50/50 split between short bullets and intermediate-term putable advances. As risk tolerances and return objectives vary, members can tailor the advances (type, part of the curve, amounts) to meet their needs.