FHLBank Boston’s HLB-Option Advance is a unique funding solution that can help support earnings and margin.
This fixed-rate advance enables members to sell the option to FHLBank Boston allowing FHLBank Boston to cancel the funding prior to maturity.
By selling this option to the Bank, the member can borrow at lower rates than comparable term Classic Advances and tailor the final maturity, lockout period, and call frequency to meet their balance sheet needs.
Longer maturities, shorter lockouts, and/or greater call frequencies will increase the amount of the discount compared to advances without the cancelation option.
This advance is useful in times when interest-rate volatility is high and when the yield curve is flat. Let’s illustrate this point:
Assume 3-month Classic Advances are priced at 0.34% and 5-year Classic Advances are at 1.11%.
At the same time, an HLB-Option Advance with a 5-year maturity, 3-month lockout, that’s callable quarterly may be priced at 0.17%.
With the HLB-Option Advance, the member can borrow at a rate below that of both short- and long-term Classic Advance rates.
At the end of the 3-month lockout and every quarter thereafter, FHLBank Boston may “put” back the funding to the member. The average life of the advance will vary depending on the level of interest rates and volatility.
As rates go down, the average life of the advance extends towards the 5-year maturity date. As rates go up, the average life of the advance contracts toward the quarterly lockout period.
You can see that this advance could be valuable for members seeking to enhance margin and with the ability to handle changes in the average life of the funding. The advance offers benefits when interest rates are range-bound and volatility declines.
Our strategies and solutions team can help you identify the funding solutions that best fit the unique needs of your balance sheet in any interest rate environment.
Visit fhlbboston.com or call us at 1.800.357.3452.
Federal Home Loan Bank of Boston
Strategic Partnerships. Reliable Funding.