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By Marianne Cacciola, Financial Strategist

Recent financial headlines regarding the current liquidity crisis and the devaluing of asset prices have spurred a flight to quality in the bond market which has driven interest rates down to recent lows. The 10-year treasury yield has just turned the corner on 3.83 percent, a level it has not seen since the spring of 2003. History undoubtedly teaches a valuable lesson, if we care to take note. A revisit to the start of the last Federal Reserve tightening cycle in mid-2004 reveals how savings accounts became sensitive to the CD “bribe” and large balances migrated into the short-term CD buckets at a high marginal cost. There is an opportunity now to extend the duration of your funding at historically reasonable rates so that when the next tightening cycle begins, your institution will be in a position where it will not need to chase CDs to maintain balances.

Amid the turmoil, Federal Home Loan Bank of Boston Classic advance rates across the curve are at two-year lows, presenting member institutions with an opportunity to ladder in cheaper funding in the declining rate environment. Since it is imprudent to believe that you will recognize the bottom of the interest-rate cycle when it arrives, the best practice may be to capture value by structuring advances out the yield curve as the dynamics of the market change. Now is an opportune time to gain extension on the funding side of the balance sheet and fill the gap between assets and liabilities. Today’s two-year Classic advance rate of 3.80 percent currently represents the trough of the advance curve, and is priced 130 basis points below the average rate of the last two years. The five-year Classic advance rate of 4.16 percent is priced 105 basis points below the average rate of the last two years.

A simple step to reduce the overall cost of funds would be to immediately reduce CD rates in line with your institution’s assumptions regarding rate changes. A typical example of a reprice assumption is for every 100 basis point decrease in rates, the expected impact on CD rates is a decrease of 90 basis points. The Fed has reduced the federal funds rate by 75 basis points, therefore in this example you would expect posted CD rates to decrease by 68 basis points. Another pricing benchmark would be to price CD rates to a comparable term on the FHLB Boston advance curve.

It may be valuable to review your institution’s asset liability model assumptions for deposit reprice activity in falling rate environments to determine if your institution is reacting as projected, and also to ensure that you have fully assessed the impact of competitive pricing pressure. When the competition heats up and you can’t afford to keep up, then it is a great time to turn to FHLB Boston to supplement your funding needs with an affordable alternative.

FHLB Boston is committed to helping members take advantage of market opportunities. Please contact our Member Financial Strategies department at 617-292-9644 to speak with a strategist about producing a funding model based on your institution’s unique funding requirements.

We offer aggressively priced specials each Wednesday on two-, three- and five-year terms. Please contact the Money Desk at 800-357-3452 for the most up-to-date pricing.