We are now experiencing a “higher for longer” phase in the interest-rate cycle, accompanied by an inversion in the short-to medium terms followed by a steepening (see following chart). The Fed is still in a restrictive posture, but market expectations indicate a near-term easing, however, uncertainty surrounding the potential of future heightened growth leading to elevated inflation is causing steepening at the longer-end of the curve.
The elevated long-end of the curve has led some members to retain higher-coupon residential mortgages on balance sheet while some are also adding longer-term securities to boost overall returns. There are opportunities in the advance curve to profitably fund these longer-term assets and lock in spread for a period of time while mitigating potential risks associated with boosting long-term asset levels.
Members may also want to consider our Fixed-Rate Advance with a SOFR Cap (Fixed-Rate with Cap) product to help assist with addressing funding mismatches while locking in spread. The additional protection of a rate cap is ideal to reduce interest expense when short-term rates rise sharply, in addition to potentially being of assistance when conducting your ALM modeling under interest-rate shock scenarios.
Hybrid Funding Opportunity for Balance Sheet Management
The Fixed-Rate with Cap is a FHLBNY advance product in which a Secured Overnight Financing Rate (SOFR) interest rate cap is embedded into a traditional fixed-rate, long-term advance. This hybrid product is designed to both “lengthen” the duration of liabilities and respond favorably in a rising interest rate environment. As interest rates rise and the quarterly compounded SOFR average increases and breaches a pre-determined strike threshold, the coupon on this advance could decline, either one basis point for every basis point that the quarterly compounded SOFR average is above the strike threshold (1× multiplier), or one basis point for every 2 basis points that the compounded SOFR quarterly average exceeds the cap strike (0.5× multiplier), with an ultimate floor of 0%. When rates rise the cost of this advance could decline, while other liability categories may become more costly. If the SOFR compounded average falls back below the strike threshold over a quarterly period, the advance will reset to its original coupon rate.
The Fixed-Rate with Cap can help with match funding long-term assets and assist with improving spread in a rising rate environment. This advance can also be particularly helpful when running regulatory interest rate-shock scenarios. For example, potentially sharp rate spikes could cause the coupon rate of this advance to rapidly decline, which would improve the present value of this advance and serve to assist with a banking member’s Economic Value of Equity (EVE) at Risk measurements (or with the Net Economic Value (NEV) Supervisory Test for credit union members).
The following illustrates the mechanics of the Fixed-Rate with Cap under a hypothetical interest rate scenario. For example, if the advance costs 3.90% with a 6% Cap, and SOFR rises and averages (on a compounded basis) 6.10% for a quarter (10 bps above the threshold), then the coupon on the advance would reduce to 3.80% for that given quarter. Should SOFR average 6.20% the next quarter, the coupon would fall to 3.70% (coupon would have a floor of zero). Should the compounded SOFR average fall to below 6% during a given quarter, the coupon would revert to the original 3.90%. When conducting regulatory shock scenarios, the advance coupon would plummet offering value when conducting your EVE at Risk or NEV Supervisory test measurements.
The cap threshold or “strike” is determined by the member at the inception of the advance. There is a $5 million minimum to this advance and a minimum term of 1 year.
The following is an example of recent quotes of the Fixed-Rate with Cap:
|
Tenor |
Cap |
Fixed Rate Advance with SOFR Cap Cost |
Regular Advance Cost (Act/360) |
|
3 Year |
6% |
3.90 |
3.86 |
|
3 Year |
7% |
3.88 |
3.86 |
|
5 Year |
6% |
4.08 |
3.98 |
|
5 Year |
7% |
4.04 |
3.98 |
Rate indications are from August 8, 2025.
To achieve further savings, members may explore incorporating the Fixed-Rate with Cap into one of the FHLBNY’s Community Lending Programs (CLP). CLP Advances are offered at a reduced rate if qualified lending is demonstrated — either residential mortgage lending, which benefits lower income families, or non-housing related lending in lower-income census tracts.
As always, the FHLBNY strives to offer members funding and hedging solutions. To learn more about the potential strategy discussed in this article, or any other funding option, contact your Relationship Manager at (212) 441-6700 or the Member Services Desk at (212) 441-6600.
Have You Considered the Economic Impact of Your Dividend?
On August 21, 2025, the FHLBNY distributed a dividend of 7.60% to members for the second quarter of 2025 (annualized). The FHLBNY has provided members with a consistent and reasonable quarterly dividend. It is important for members to factor in the economic benefit of the dividend, which, depending on the advance term, can substantially lower the “all-in“ borrowing cost of an advance. For a detailed analysis, Contact your Relationship Manager at (212) 441-6700 or the Member Services Desk at (212) 441-6600.