Investment Strategy Considerations Cash, Cash and More Cash – Oh My! - Tucson Federal Credit Union

Investment Strategy Considerations Cash, Cash and More Cash – Oh My!

Written by Stacey Wilkerson, Chief Financial Officer

Considering the nation’s center stage is crowded with the upcoming presidential election, and the nomination to replace our highly respected Supreme Court Justice Ruth Bader Ginsburg, looming discussions surrounding a potential second stimulus check appear complicated with the outcome highly unknown. Plus, financial institutions across the states are flushed with cash, and a similar deposit influx could be knocking on the door very soon. While my fellow CFO’s and I deal with various impacts from the pandemic, let’s talk about the growing importance encompassing our investment portfolios.

We all know there isn’t a one-size-fits-all investment strategy due to the complexities embedded within our balance sheets; and, I am excited to share some key insights on TFCU’s approach. As elementary as this might sound, we all need to review our investment policies to ensure our policy limits are not unnecessarily restricting our best ideas. As the CFO of a federal credit union, the permissible investment sandbox is already so small that we need to be more prudent with our limits.

Prior to the pandemic, TFCU’s investment portfolio effective duration rested near 1.00% with higher allocations to post reset hybrid ARM pools and fixed CMO and CMBS bonds. While my past efforts continued to focus on lengthening the duration, our strong loan demand (primarily direct autos and mortgages) practically absorbed the lion’s share of excess funds. This year, like my CFO cohorts, I’m finally faced with a sizeable amount of excess cash to be deployed.

Always remember, there are several ways to construct a strategy after defining your desired duration target and goals; however, this was my approach. TFCU’s portfolio was short with little to no credit risk. I was targeting around a 3% duration for excess funds. Given this duration, you could purchase a 3-year Treasury / agency debt yielding 16 – 18 basis points, new issue 3-yr callable yielding 28 bps or consider mortgage related securities. Another curve ball to consider: our good friend, the Fed, deployed a massive asset purchase program gobbling up various important credit union permissible assets. I decided on a barbell strategy. Since May, we have invested $25 million in Freddie K monthly floaters, paired with longer maturity high credit quality municipal bonds to achieve our established 3% duration target and goals. To all my friends in a similar cash position, happy investing and be careful out there.