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2016 Long-Term Borrowing Activity

May 3, 2016

By Dan Redmond

Sluggish global growth,political uncertainty, increasing expectations for a slower moving Fed, and a strong U.S. dollar are factors contributing to the uneasiness surrounding the economy in 2016. As a result, a flattening yield curve has created opportunities to extend advance maturities and lock-in attractive rates.

During 2015, long-term advance balances increased by close to 25 percent from the prior year. Since the start of this year, long-term borrowing activity has continued to be solid, keeping stride with last year's robust pace.

In the first quarter of 2016, members accessed a variety of long-term advance solutions to secure funding with maturities out as far as 10-years. To provide the most effective blend of security and price, members continue to hedge interest rate risk by using a combination of Classic and Amortizing Advances as well as structured advances.

Since the start of the year, the Bank has conducted special advance offerings priced as much as 20 basis points off our posted advance rates. While Classic, Flipper, and HLB Option Advances continue to be popular, advances with varied features and benefits — such as the Classic Plus Cap Advance — have also been part of the mix. The Classic Plus Cap combines the protection of a Classic Advance with an embedded interest rate cap, providing members with the long-term security of a fixed-rate advance and the potential to decrease interest expense should short-term rates rise.

Multiple Knockout Advance specials have also been offered, providing members an alternative to the HLB Option Advance. Like the HLB Option, the Knockout allows members to borrow at lower rates by selling the option to cancel prior to the advance's stated maturity. But the Knockout also eliminates uncertainty surrounding cancellation of the advance by automatically cancelling on specified dates if LIBOR is equal to or greater than a predetermined strike rate.

In addition to our standard advance specials, we continue to offer the Advance Renewal Discount Program. Initially offered in 2015 on a limited basis and available again in 2016, this popular program allows members to renew maturing advances into new, qualifying, long-term borrowings that automatically receive a discounted rate. It's like having an advance special available at any time. Since its inception last September, 36 members have used the program to renew and extend more than 75 maturing advances.

The current market and the Bank's robust advance solutions provide an opportunity for members to address interest rate risk concerns. We will continue to offer discounted advance specials as market opportunity and member interest dictate. Please do not hesitate to contact the Money Desk or your relationship manager if you have 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.

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