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Market Intelligence

Finding Funding: What the Swap Curve Says

When reviewing funding needs in the current competitive marketplace, you’ll no doubt search out funding that doesn’t cause negative carry and cannibalize your low-cost deposits. For this reason, many member financial institutions are looking toward two-year to five-year bullet funding from FHLBank Pittsburgh. It’s in this part of the curve that you can find funds with costs under 5.00%  – a reasonable cost of funds without having to enter into more risky option-embedded structures.

Exploring the Dip in the Swap Curve

FHLBank Pittsburgh executed approximately $1 billion in mid-term advances in the first quarter of 2007. The average rate on this funding was 4.99%. One member even locked in a 4.80% rate for three years – a funding rate much more attractive than many CD specials being offered in the marketplace.

By reviewing the swap curve, you can ascertain the market’s expectation for rates. Notice the “dip” in the swap curve. Is the market predicting that future rates will be lower? Do you believe rate cuts are inevitable? If so, how far will the rates fall?  Your answers to these questions are a starting point in making your funding decisions.

Besides locking in funding today at sub-5.00% rates, in some cases you can take advantage of the market’s rate expectations to secure future funding at even lower levels. For instance, a current two-year advance would cost roughly 4.95%. But, by locking in the advance rate today for future funding starting in nine months, this two-year advance will cost you 4.74%. With Fed funds hovering in the 5.25%-5.3125% range, it would take a 50 basis point Fed cut to match this funding rate.  Forward funding for upcoming funding shortfalls or future asset purchases is just another option to consider in the current environment.*

FHLBank Pittsburgh Advance Pricing Can Meet Your Funding Needs

To aid our members, FHLBank Pittsburgh’s Asset Liability Committee recently approved new advance pricing guidelines that resulted in lowering many advance spreads. This change allows for better advance pricing for members at a time when financial institutions are searching out any cost savings they can find. Please take the time to review the opportunities provided in the marketplace and call FHLBank Pittsburgh’s Money Desk for current advance pricing. You may very well find funding to fill certain gaps at rates that are not so unreasonable.

* Note: Currently, forward-starting advance requests will be reviewed on a case by case basis and only approved if such request does not adversely affect any risk parameters of FHLBank Pittsburgh.

DISCLAIMER

The rates and other terms used in this article are for informational purposes only and subject to change at any time without notice of any kind. The information presented is not investment or business advice, nor is it an offer to extend credit or buy any security or financial product. Readers must not rely on any of this information when making any investment, business or credit decision.

FHLBank products are governed by various agreements between FHLBank and its customers, as well as certain FHLBank policies and applicable regulations. In the event of any inconsistencies between information contained in this article and such agreements, policies and regulations, the agreements, policies and regulations will be determinative.