August 18, 2015
By Dan Redmond
Ongoing market volatility with intermittent dips in rates has triggered a spike in long-term borrowing and provided an opportunity for members concerned with rising rates.
In 2015, 119 members accessed more than $2.2 billion in long-term advance funding with maturities up to 10 years. This represents an increase in long-term activity of more than 30 percent compared with the same period last year.
Members have been taking advantage of Bank advance specials to access discounted long-term funding, including an August 12 Money Desk offering that included two, three- and 10-year Classic advances and a 10-year/five-year HLB Option advance.
The fixed-term, fixed-rate HLB Option advance allows members to borrow at lower rates by ‘selling' the Bank the option to cancel the advance on specified dates prior to maturity. For the August 12 special, the Bank retained the option to cancel the advance after five years and quarterly thereafter. Priced at 1.85 percent, the advance was 20 basis points below the posted rate for the five-year Classic advance. Members taking advantage of the special secured over $50 million in discounted, long-term funding.
Members this year also placed bids on long-term funding through Dutch Auction specials, accessed floating-to-fixed pricing with the Flipper advance, and accessed additional protection against rising rates with the Classic Plus Cap advance.
In response to member interest, the Bank in May introduced the spread-to-benchmark special. This alternative format allows members to secure a fixed-rate advance at a pre-announced spread based on a prevailing benchmark rate (for example, a five-year swap rate). This option may be attractive to members looking to lock in a specific spread when purchasing an asset and taking down an advance at or close to the same time.
In addition to special offerings, the Bank offers a variety of advance products to help members mitigate interest rate risk. A list of advance products and a matrix listing product solutions by interest rate outlook — including products structured to perform best in a rising rate environment — are available on the Bank's website.
Long-term advance rates and the Bank's advance products offer excellent opportunities to hedge against rising rates. The Bank will continue to offer advance specials based on market opportunity and member interest. The majority of our special offerings are driven by member feedback, so please contact the Money Desk or your relationship manager if you have an interest in a specific advance product, structure, or term.
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Dan Redmond is vice president/Money Desk manager at the Federal Home Loan Bank of Boston.