​Funding Lookback: Lessons Learned

Derek Hamilton
​Derek Hamilton

In the current rate environment, members anticipate a series of rate cuts that will help ease margin pressure and begin a new growth cycle. However, an analysis of past rate cycles can help inform members on the optimal time to stay with short-term or long-term wholesale funding.

​Rate Environment: 2019-2020

With short-term rates rising steadily from the end of 2015 into 2019, the Federal Reserve Bank pivoted to cutting rates in 2019 as the economy began to down-shift. An inverted yield curve resulted as longer-term Treasury rates initially declined faster than the elevated short-term rates.


As the impact of rate cuts materialized, the slope of the yield curve normalized. FHLBank Boston’s advance rates followed a similar path as Treasury rates. After the first 75 basis points of cuts, at every point on the Classic Advance yield curve through the one-year tenor, the Daily Cash Manager (DCM) Advance was lower and provided a funding discount compared to other short-term rates. Utilizing DCM advances and staying short allowed members to not be locked in for an extended period of time. This was especially helpful in the downrate environment and proved to be beneficial until rates hit a floor in 2020.

Market sentiment in 2019 priced in the expectation that short-term rates would move lower. However, the timing and magnitude of the eventual rate cuts made it such that rolling DCM advances outperformed rolling Classic Advances. For example, if a member took a $10 million three-month Classic Advance in the beginning of 2019 and rolled the advance every three months for a year, they would have incurred an extra $43,000 of interest expense compared to rolling a DCM advance. Under normal market conditions, interest expense increases as advance tenors lengthen. If an FHLBank Boston member took a $10 million one-year Classic Advance, they would have incurred an extra $49,000 of interest expense compared to rolling DCM advances over the same period. This disparity continued into early 2020 and almost doubled (rolling a three-month Classic Advance incurred an extra ~$97,000 of interest expense compared to rolling a DCM Advance for the same period, and rolling a one-year Classic Advance incurred an extra ~$74,000 of interest expense compared to rolling a DCM Advance for the same time period) as rates stabilized.

​Rate Environment: 2022 - 2024

The post-pandemic years presented a unique interest-rate environment. Along with a negatively sloped yield curve and high rates, market sentiment remained optimistic for rate cut(s). Rates began to rise in 2022, but the Treasury yield curve also began to invert.

“The long-term funding benefit has diminished slightly throughout 2023 and 2024, but there have been opportunities for FHLBank Boston members to save on interest expense when increasing the maturity of their wholesale funding.”

FHLBank Boston members who opted for long-term advances at this point capitalized on the low rates, and if they went out on the curve far enough, they realized significant cost benefits as rates in 2024 remained substantially higher than initial expectations. During this time, wholesale funding usage began to increase as members utilized excess cash to fund loan growth and found themselves in need of wholesale funding. As opposed to 2019, adding liability duration benefited the member greatly in interest expense savings. For a $10 million one-year Classic Advance in the beginning of 2022, a member would have saved almost $100,000 of interest expense compared to rolling daily funding.

The long-term funding benefit has diminished slightly throughout 2023 and 2024, but there have been opportunities for FHLBank Boston members to save on interest expense when increasing the maturity of their wholesale funding. While 2022 saw rising rates, and the yield curve slope move from positive to negative, 2023 saw an inverted yield curve as the prospect for further rate increases stalled. Sentiment changed and hopes for rate cuts increased as net interest margin (NIM) compressed, and the rise in interest expense outpaced the improvements in interest income for many members.

During this period of yield curve inversion, short-term rates were stable but elevated while rates further out on the yield curve received the benefit of the inverted yield curve during the period known as “higher for longer."


These longer rates baked in anticipated rate cuts which ultimately never materialized, even through August 2024. This widened the spread between overnight and short-term rates, allowing members to save on interest expense on their FHLBank Boston wholesale funding, particularly at the nine-month and one-year tenors. In a similar scenario analysis as noted above, a $10 million nine-month advance from March 2023 to January 2024 saved roughly $74,000 in interest expense compared to rolling overnight funding over the same timeframe, and a one-year advance would have saved $80,000 of interest expense compared to rolling DCM advances through August 2024.

A look at previous interest rate cycles shows that members should be exploring opportunities across the yield curve to address wholesale funding needs while balancing the impact of a changing rate environment. During downrate environments with a positive sloping yield curve, staying short on wholesale funding tends to be more beneficial on cost. Short-term funding rates may continue to move lower, benefiting the member through the ability to reprice at a lower rate. However, when the yield curve is inverted and rates are flat to rising, longer-term advances can provide funding cost relief as long-term rates are lower than short-term rates. Members can also mitigate the repricing risk of short-term rates remaining high or even moving higher, and the wholesale funding cost savings can help to enhance net interest margin.

Flexible Funding

Recent market conditions have created challenges and opportunities for FHLBank Boston members. Our Financial Strategies group has developed a suite of analytical tools designed to help you identify the funding solutions that best fit the unique needs of your balance sheet. Please contact me at derek.hamilton@fhlbboston.com, or your relationship manager for more details.


FHLBank Boston does not act as a financial advisor, and members should independently evaluate the suitability and risks of all advances.  The content of this article is provided free of charge and is intended for general informational purposes only, FHLBank Boston does not guarantee the accuracy of third-party information displayed in this article, the views expressed herein do not necessarily represent the view of FHLBank Boston or its management, and members should independently evaluate the suitability and risks of all advances. Forward-looking statements: This article uses forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is based on our expectations as of the date hereof. All statements, other than statements of historical fact, are "forward-looking statements," including any statements of the plans, strategies, and objectives for future operations; any statement of belief; and any statements of assumptions underlying any of the foregoing. The words "expects", "may", “likely”, "continue", "to be", "will," and similar statements and their negative forms may be used in this article to identify some, but not all, of such forward-looking statements. The Bank cautions that, by their nature, forward-looking statements involve risks and uncertainties, including, but not limited to, the uncertainty relating to the timing and extent of FOMC market actions and communications; economic conditions (including effects on, among other things, interest rates and yield curves); and changes in demand and pricing for advances or consolidated obligations of the Bank or the Federal Home Loan Bank system. The Bank reserves the right to change its plans for any programs for any reason, including but not limited to legislative or regulatory changes, changes in membership, or changes at the discretion of the board of directors. Accordingly, the Bank cautions that actual results could differ materially from those expressed or implied in these forward-looking statements, and you are cautioned not to place undue reliance on such statements. The Bank does not undertake to update any forward-looking statement herein, or that may be made from time to time on behalf of the Bank.

Derek Hamilton
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