Economic Environment and FHLB Advance StrategiesDec 20, 2016  · Economic Environment and FHLB...

Economic Environment and FHLB Advance Strategies

Jason Hwang

VP / Director, Planning and Research

Kevin Martin

VP / Member Financial Strategies

December 20, 2016

This webinar is being recorded

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.

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Disclaimer

GDP Update and Outlook

Labor Market, Inflation, and Fed Funds Rate

Trump Economic Agenda

Advance Rate Curve

Advance Strategies: HLB-Option advance and Flipper advance

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Today’s Topics

GDP Update and Outlook

Real GDP Growth, 2015Q1-2016Q3After weak first half of year, very strong Q3; 1.8% annualized GDP growth to date in 2016

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1.4%

3.2%

0.8%

Contribution to Real GDP GrowthDecline in GDP was driven by reduction in inventories; consumption remained strong

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Consumption slowing?

Sustainable increase in exports?

Big reversal in inventories?

Durable Consumption and Automobile Sales

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Consumer Sentiment

Surveys of Consumers, University of Michigan

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Source: http://www.sca.isr.umich.edu/

Contributions to Real Exports Huge Q3 increase in agricultural exports, likely transitory, due to poor harvest in S. America

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Inventories to Sales RatioGiven the buildup in inventories, unclear inventories will provide boost to growth going forward

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Projections of Q4 GDP

11Source: Federal Reserve Bank of Atlanta

Labor Market and Fed Funds Rate

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Labor Market Spider ChartOn most metrics, current conditions better than pre-recession, except for utilization

4.6%

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Labor Force ParticipationParticipation rate appears to have reached a bottom in late 2015; employment growth starting to pull

discouraged workers back into labor force

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PCE InflationRemains below 2% target but trending up

FOMC Projected Fed Funds RateMedian projection of three rate hikes in 2017

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Trump Economic Agenda

Trade reform

• Withdraw from Trans-Pacific Partnership and renegotiate North American Free Trade Agreement

• Bring WTO cases against China

Infrastructure spending

• $100+ billion in tax credits to spur $1 trillion private investment in infrastructure

Tax reform

• Simpler, lower rate schedule; exemptions/deductions simplified; estate tax and AMT repealed

• Sharp reduction in corporate tax rate

Deregulation

• Potentially large impact on energy and financial services industries

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Broad Outline

Fiscal stance projected to shift in 2017 from broadly neutral to expansionary.

• Projected fiscal stimulus will reverse marked slowdown in spending on public infrastructure

GDP projected to grow modestly in 2017 and strengthen in 2018, due to projected fiscal stimulus.

• Boost to spending on infrastructure and other investments will counter decline in labor force participation rate

• Reforms to personal and corporate taxation could enhance efficiency by lowering marginal rates and removing provisions that narrow the tax base and invite tax avoidance

Projected fiscal support will boost GDP growth by 0.5% in 2017 and 1% in 2018.

• Household spending to continue at healthy pace, supported by tax cuts

• Business investment expected to surge following cuts to corporate income tax

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OECD Analysis

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OECD Outlook for the U.S. Economy Post-Election

Source: OECD Economic Outlook, www.oecd.org

Advance Rate Curve and Strategies

Advance Rate Curve and Strategies

FHLB Boston Classic Advance Curves

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0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

1W 1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y

12/21/2015

7/5/2016

11/7/2016

12/16/2016

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FHLB Boston – Implied Forward Advance Rates

1.18%

1.69%

1.99%

2.30%

2.54%

2.74%2.88%

3.07%

3.29%3.39%

2.21%

2.41%

2.70%

2.92%

3.10%3.23%

3.42%

3.67%3.76%

2.61%

2.95%

3.16%

3.33%3.43%

3.63%

3.88%3.96%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

1Y 2 3 4 5 6 7 8 9 10Y

12/16/2016 12/16/2017 12/16/2018

Through November disbursed $1.857B of HLB-Option and Flipper advances

• $70M have cancellation dates in January

Let’s review these advance types and look at how you can determine how your advance will behave at the cancellation/flip date

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Structured Advances 2016

Member receives a lower advance rate than on Classic advances of same maturity

Member sells FHLB Boston the option to cancel the advance prior to final maturity

Fixed rate, nonamortizing advance

• Final maturity – out to 20 years

• Lockout period – three months to 10 years

• Generally quarterly cancellation dates, but can also be 1x

You are guaranteed the funding during the lockout period

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HLB-Option Advance

Recent Offering

• 15-Year / One-Year; “Bermudan” quarterly

• Advance rate 0.39%

• FHLB Boston holds quarterly option to cancel the advance

• You are guaranteed funding for one year at 0.39%

First opportunity to cancel advance is after one year

Generally:

• rates advance cancelled

• rates advance extends

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HLB-Option Advance

Sub-LIBOR floater during lock-out period

• Generally, starting rate is less than 1 basis point

• Advance rate resets quarterly during lockout period

The rate can reset at an interest rate less than zero

At the end of the lockout period

• FHLB Boston has option to cancel, or

• We can “Flip” the advance to the fixed rate agreed upon at trade date until the next cancellation date

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Flipper Advance

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How Can I Evaluate My Advance?

This analysis is available on our website

This schedule shows market values in eight rate-shock environments

• Members use these values for their call reports

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How Can I Evaluate My Advance?

3Y / 1Y HLB-Option advance – quarterly calls

• 1.12% advance rate

• First cancellation date January 9, 2017

• Base case MV of 100.519 – close to being cancelled

• Generally, if the MV is below par the advance is cancelled

• On December 16, we looked at a 2Y / 3m; it was priced at 1.25% --advance would be cancelled

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How Can I Evaluate My Advance?

4Y / 1Y Flipper advance – quarterly calls

• 3mL less 60 bp advance rate during lockout – current 0.27389%

• 1.87% if “Flipped”

• First cancellation date January 12, 2017

• Base case MV of 101.840 – advance likely to be “Flipped”

• Generally, if the MV is below par, the advance is cancelled

• On December 16, we looked at a 3Y / 3m; it was priced at 1.30% --advance would, most likely, be “Flipped” to a fixed rate of 1.87% for, at least, the next three months

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Questions?