In periods of market stress, members turn to FHLBank Boston advances to strengthen on-balance sheet liquidity. During the volatility in March, many members utilized advances with maturities between three months and 12 months to guard against potential credit issues, cash ﬂow disruptions, illiquidity in the bond markets, and uncertainty with deposit growth and retention.
Extending the maturity of ﬁxed-rate funding may allow for greater peace of mind from a liquidity perspective, but with a positively sloped yield curve, the trade-off is a higher interest rate. For asset-sensitive institutions, the added liability duration may not be ideal from an interest-rate risk perspective.
One way to beneﬁt from the liquidity beneﬁts of long-term funding but maintain the pricing and duration of the short-end of the curve is with the Discount Note Auction-Floater (DNA Floater) Advance.
The chart below shows pricing on April 2, 2020 for Classic Advances from three to 12 months as well as a DNA Floater Advance with a 12-month maturity that resets quarterly. The steeper yield curve allows for favorable rates on the ﬂoating rate advance — four basis points below the comparable three-month Classic Advance.
With 23 basis points of steepness between three-month and 12-month rates, the DNA Floater Advance would allow a member to secure funding for one year and keep exposure and cost tied to the short-end of the curve.