Economic Environment and FHLB Advance Strategies

Transcription

1 Economic Environment and FHLB Advance Strategies July 26, 2018 This webinar is being recorded Jason Hwang VP / Director, Planning and Research Kevin Martin VP / Manager of Financial Strategies Dan Redmond VP / Money Desk Manager

2 Disclaimer This information is being presented for general information only. The information contained herein was obtained from sources that we believe to be reliable, but we do not guarantee its accuracy or completeness. Members should not construe any of this information as business, legal, tax, or accounting advice from the Bank. Members should consult with their own independent business, legal, tax, and accounting advisers with respect to any of the material presented here. 2

3 Today s Topics Economic Update Labor Market and Inflation GDP Growth Yield Curve Inversion as a Signal of Recession Risk Advance Rate Curves Advance Solutions: Expander advance Borrowing Recap and Advance Solutions 3

4 Labor Market and Inflation

5 Labor Market Spider Chart Closer to outer ring means stronger labor market 5

6 December 2007: Previous Expansion Peak Labor market was widely thought to be at full employment 6

7 July 2017: A Year Ago Stronger than pre-recession peak on many dimensions, except for wages and utilization 7

8 June 2018 Labor market has further tightened, at or near best performance since the 1990s on many dimensions, and improving on wages 8

9 Unemployment Rate Lower than at previous peak, both on narrow and broader measures of unemployment 9

10 Labor Force Participation Rate Stable overall for past two years; rising for year olds 10

11 Wage Growth Wage growth, though improving, still lags pre-recession performance 11

12 PCE Inflation Overall inflation exceeding Fed target of 2% since April 2018; core inflation, slightly below 2%, trending higher 12

13 Gross Domestic Product

14 Contributions to Real GDP Growth Weak Q1 GDP growth driven by slowdown in consumption 14

15 Index of Consumer Sentiment, University of Michigan Consumer sentiment remains strong, reflecting strong job prospects 15

16 Contributions to 4.5% projected real GDP growth: Consumption 2.2% Nonresidential investment 0.82% Net exports 0.72% Atlanta FRB GDP Now as of July 17, 2018 Projecting very strong growth in second quarter 16

17 Yield Curve Inversion?

18 Term Spread Between 10-Year and 1-Year Treasury Rates Simple Rule of Thumb: Recession within two years when Term Spread is Negative Correctly predicts all nine recessions since 1955 Only one false positive in 1960s when inversion was followed by slow-down but not official recession Delay between term spread turning negative and beginning of recession ranges from 6 months to 24 months

19 Will the Yield Curve Invert? One possible rate path based on current projections Fed Funds Rate 1-Yr Treasury 10-Yr Treasury 10-Yr/1-Yr Spread Jul Dec Dec Fed funds rate projections based on June 2018 FOMC projections 10-Year treasury rate projections based on July 2018 WSJ survey of forecasters 1-Year treasury rate projections based on fixed spread to fed funds rate

20 This Time is Different? The increase in short-term interest rates is starting from a historic, prolonged, near-zero-rate environment and may have less of a tightening effect on the economy Low long-term rates do not necessarily reflect a pessimistic outlook on the economy but rather a new normal for interest rates (due to a lower natural rate ) Predictive quality of yield curve may have been distorted by quantitative easing (has the demand for longer-term, safe bonds been decoupled from longer-term economic outlook?) June 2018 FOMC Meeting Minutes Some participants noted that such factors might temper the reliability of the slope of the yield curve as an indicator of future economic activity; however, several others expressed doubt about whether such factors were distorting the information content of the yield curve. A number of participants thought it would be important to continue to monitor the slope of the yield curve, given the historical regularity that an inverted yield curve has indicated an increased risk of recession in the United States. 20

21 Date of Forecast Real GDP Growth FOMC Jun % 2.40% 2.00% WSJ Survey Jul % 2.40% 1.80% Phil. Fed SPF May % 2.70% 1.90% Unemployment Rate FOMC Jun % 3.50% 3.50% WSJ Survey Jul % 3.60% 3.80% Phil. Fed SPF May % 3.70% 3.90% Inflation FOMC (PCE) Jun % 2.10% 2.10% WSJ Survey (CPI) Jul % 2.30% 2.30% Phil. Fed SPF (PCE) May % 2.10% 2.10% Fed Funds Rate at Year End FOMC Jun % 3.10% 3.40% WSJ Survey Jul % 3.00% 2.99% Source: FOMC ( WSJ survey ( Philadelphia Fed Survey of Professional Forecasters ( data/real-time-center/survey-of-professional-forecasters/) 21

22 Advance Rate Curves

23 FHLBank Boston Classic Advance Curves 4.00% 3.50% 3.00% 12/16/2016 6/30/ /15/2017 7/20/ % 2.00% 1.50% 1.00% 0.50% 0.00% 1W 1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 23

24 FHLBank Boston Implied Forward Advance Rates 4.00% 3.80% 3.60% 3.40% 3.20% 3.00% 3.39% 3.24% 3.32% 3.30% 3.33% 3.32% 3.07% 3.51% 3.34% 3.14% 3.65% 3.49% 3.18% 3.72% 3.60% 3.32% 3.79% 3.79% 3.74% 3.75% 3.67% 3.57% 3.59% 3.50% 3.43% 2.80% 2.99% 7/20/2018 7/20/2019 7/20/ % 2.60% 2.40% 2.20% 2.00% 1Y Y 24

25 Advance Solution

26 Expander Advance Long-term, fixed-rate, nonamortizing advance Member holds 1x option to double the outstanding amount of the advance New funds are at the existing rate for the remaining term to maturity Member is under no obligation to exercise the option to take down additional funds Current indications: 3Y/1Y 3.23% 5Y/2Y 3.40% 26

27 Expander Advance - Strategies Use in a rising rate environment Reduces exposure to rising interest rates since you have the ability to take down additional funding at a predetermined rate The expansion opportunity may be used to offset outflows of surge deposits The expansion opportunity may be used to fund the extension of asset lives in a rising rate environment No need to match competitors deposit rates to compete for funding in a rising rate environment 27

28 Borrowing Activity Recap

29 Long-Term Borrowing Activity 2018 Advance Renewal Discount Program 41 Members 95 Advances $846 Million 2018 LT Borrowing Activity By Product Type 6% 2018 Activity summary: Classic Advance 67% Putable Advances 27% Amortizing Advance 6% 27% 67% Classic Putable Amortizer 29

30 Thousands Long-Term Borrowing Activity $1,000,000 $900,000 $800,000 $700,000 $600,000 Long-term Disbursements Comparing January - June 2015, 2016, 2017 & 2018 Year-To-Date Disbursements* $2,042,557, $2,718,377, $2,784,175, $2,403,475,000 *Includes Insurance Co. Activity $500,000 $400,000 $300,000 $200,000 $100,000 $0 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year >7 Years 30

31 Advance Solutions Funding Opportunities Short-Term Markdown Offerings Tuesday and Thursday Discounted pricing available from 10:00 10:45 a.m. One-, Two-, Three- and Six-month terms Upcoming Special Offerings Expander Advance Wednesday, August 1 10:00 11:00 a.m. Five-Year / Two-Year Rate - TBD Contact the Money Desk moneydesk@fhlbboston.com 31

32 Questions?