After years of anticipating a return to lower interest rates, many financial institutions have come to recognize that rates may remain elevated for longer than originally expected. While a higher-for-longer environment presents challenges—including deposit competition, funding pressures, slower loan demand, and margin compression—it also creates opportunities for well-positioned institutions to enhance earnings, strengthen liquidity, and support strategic growth.
One tool available to Federal Home Loan Bank of New York (FHLBNY) members is the strategic use of advances. When incorporated thoughtfully into balance sheet management, advances can provide leverage, mitigate risk, and improve bottom-line performance.
Current Environment
The US Treasury curve has shifted and steepened during the first half of 2026, with the largest increases occurring in the 1- to 5-year segment of the curve. The market significantly reduced expectations for near-term Fed easing, while long-term rates remained relatively anchored. As a result, the curve became more positively sloped, reinforcing a higher-for-longer interest rate narrative and increasing the opportunity cost of carrying excess liquidity.
The yield curve's evolution reinforces several key themes:
- Higher-for-longer has become the dominant market narrative, increasing the likelihood that funding costs remain elevated through 2026.
- Deposit competition is likely to remain intense, as short-term Treasury and money market yields continue to provide attractive alternatives to traditional deposits.
- Asset yields continue to improve, creating opportunities for loan production and investment portfolio reinvestment at higher rates.
- Margin management becomes increasingly important, as funding costs may remain sticky for a prolonged period of time.
- Term funding and wholesale funding strategies become more attractive, particularly where institutions can lock in funding costs and support earning asset growth.
- Balance sheet flexibility and liquidity management remain critical, as uncertainty surrounding the Fed's ultimate policy path persists.
Managing Funding Cost at the Margin
A prudent approach to managing funding costs in today's environment is to focus on the marginal cost of funds rather than the average cost of deposits. While core deposits are often viewed as the lowest-cost funding source, the more relevant question is what the next dollar of funding will cost to attract or retain. In a highly competitive deposit environment, institutions may be paying higher rates on CDs, money market accounts, promotional offerings, and relationship deposits to prevent runoff. A marginal cost of funds analysis compares these incremental deposit costs—including pricing concessions, acquisition expenses, and expected repricing behavior—against alternative funding sources such as FHLBNY advances. In many cases, wholesale funding may be comparable to, or less expensive than, the true marginal cost of deposits while offering greater certainty of term, amount, and duration. By evaluating funding decisions through a marginal cost framework, institutions can make more informed balance sheet decisions, improve net interest margin, optimize liquidity, and avoid unnecessarily overpaying for deposits in pursuit of growth or retention objectives.
For example, the chart below shows a $70 million Money Market Deposit Account (MMDA) with a current rate of 3.50% and annual interest expense of $2.45 million. It evaluates the potential impact of lowering the MMDA rate by 25 basis points and replacing assumed outflows with 1-week FHLBNY advances at 3.71%. Depending on the level of outflow, 10%, 20%, or 30%, this approach could generate estimated annual savings ranging from approximately $78.6 thousand to $142.9 thousand. Highlighted in yellow is the true cost to retain the “hot money” within this deposit segment.
FHLBNY advances can provide an alternative source of funding that allows institutions to diversify their liability structure rather than relying exclusively on deposits. By supplementing funding with advances, institutions can reduce pressure to aggressively reprice deposits while maintaining adequate liquidity to support lending and operations.
Pre-Funding Strategy
In a higher-for-longer rate environment, institutions can improve earnings performance by using short-term FHLBNY advances to fund securities purchases and loan growth ahead of anticipated balance sheet cash flows. Rather than allowing cash flows to accumulate before deploying assets, this strategy enables immediate investment at currently available market yields while relying on future principal and interest payments to gradually retire the associated funding. By bringing forward asset deployment and matching borrowings to expected cash generation, institutions can increase balance sheet productivity, enhance net interest income, and maintain prudent liquidity management.
For example, an institution expecting approximately $100 million of balance sheet cash flows over the next twelve months could invest that amount today in agency 30-year MBS yielding approximately 5.15% and fund the purchase with a one-year FHLBNY advance at 4.14%, generating a spread of just over 1%. As principal and interest cash flows are received by the end of year one, the advance balance can be reduced accordingly. Alternatively, funding the position with a one-month advance at 3.70% would increase the initial spread to roughly 1.45%, assuming funding costs remain unchanged. This pre-funding approach allows institutions to capitalize on attractive investment opportunities immediately, rather than delaying deployment until deposits or other funding sources become available.
Enhancing Earnings Through Leverage
In the higher-for-longer environment, some members have experienced pressured loan growth in addition to diminished deposit growth opportunities, negatively impacting bottom-line earnings and capital growth.
Depending on your capital position and interest-rate risk profile, you may have capacity for adding investments (or loans if demand exists) to bolster bottom-line income and capital. The FHLBNY offers a broad suite of advance products designed to help members fund assets, manage liquidity, and optimize balance sheet performance across a variety of market environments. Members can choose from traditional fixed-rate advances to lock in funding costs, callable advances to potentially lower funding expenses and manage convexity, and short-term or floating-rate structures to maintain flexibility as market conditions evolve. With a diverse suite of funding solutions available, institutions can tailor their borrowing strategies to align with asset duration, cash flow characteristics, earnings objectives, and interest rate risk management goals.
Conclusion
A higher-for-longer interest rate environment presents challenges, but it also creates opportunities for institutions to strengthen performance through disciplined balance sheet management. FHLBNY advances can serve as a valuable tool to diversify funding, support asset growth, manage interest rate risk, enhance liquidity, and improve earnings. When used prudently within a comprehensive asset-liability management strategy, advances can help institutions navigate uncertainty while positioning themselves for long-term success.
To learn more about these and other funding opportunities, contact your Relationship Manager at (212) 441-6700.