PLANO, Texas– A rising interest rate environment—in a year when most had forecast decreasing rates—has raised a host of new questions and issues for credit unions when it comes to managing their balance sheets moving forward, including around deploying liquidity, NEV, borrowing and more.
As part of the CU Daily’s 2026 Profitability Imperative Series, Mark DeBree, managing principal with Catalyst Corporate, is sharing his insights on what rising rates will mean and how credit unions should be responding.
As the CU Daily reported here, the Fed moved this week to raise rates a quarter-point, the first increase since 2023. The move will affect a broad swatch of the U.S. economy, and DeBree said the best way to understand what rising rates could mean is to first take a step back and looking at why rates are moving in the way they are.
“The biggest reason is that inflation has remained more persistent than the market expected, with energy prices adding renewed pressure,” DeBree said. “This has caused the markets to reconsider the prior expectation that the Federal Reserve would move rates lower. As of (Sept. 16th), Fed Funds Futures were pricing a 92.9% probability of a quarter point increase: up from only 33% last month.”
DeBree noted Federal Reserve data supports the forecast, pointing out that between July 29 and Sept. 14 the expected overnight-rate component of the 10-year Treasury increased from 3.44% to 3.68%, while the modeled 10-year yield increased from 4.75% to 4.98%.
“Interestingly, the estimated term premium declined slightly, from 1.31% to 1.29%,” DeBree explained, citing Federal Reserve Bank of San Francisco data. “That suggests the latest increase in the 10-year Treasury was driven more by a change in the expected path of short-term rates than by investors suddenly demanding significantly more compensation for holding longer-term debt.”
Not the Entire Story
But DeBree said all of that is not entirely an inflation or Federal Reserve story.
“The Treasury market is also being asked to absorb a substantial amount of government borrowing,” DeBree said. “This adds pressure to the market, although the Treasury’s data do not tell us exactly how much of the recent increase in yields can be attributed directly to additional debt issuance.”
In plain terms, said DeBree, the latest move in longer-term rates appears to be driven primarily by persistent inflation, higher energy costs, and a significant change in expectations for Federal Reserve policy.
“Treasury borrowing and the compensation investors require to hold longer-term debt remain part of the story, but this is not being driven by any one factor alone,” said DeBree.
The Q&A
In response to questions from the CU Daily, DeBree offered these responses:
The CU Daily: Had you anticipated that the 10-year Treasury yield would rise to around 5% in 2026?
DeBree: No, we did not expect this heading into the year, and I do not believe most credit unions did either.
The general expectation was for rates to remain stable or gradually decline as the economy softened, unemployment moved somewhat higher, and inflation remained relatively close to the Federal Reserve’s target. Instead, the economy proved more resilient than anticipated and inflation moved a little higher. Given those developments, the increase in longer-term rates is understandable, but it was not our base-case expectation entering 2026.
The CU Daily: What do rising yields mean for Catalyst Corporate and natural-person credit unions?
DeBree: The most immediate implication is that both lending and deposit rates are likely to move higher. For natural-person credit unions, however, the bigger issue is the effect on members.
Higher borrowing costs will generally slow demand for auto loans, mortgages, and other financing. Members are also continuing to deal with higher everyday expenses, including food and energy, so another increase in borrowing costs will not necessarily be welcome.
From Catalyst’s perspective, our member credit unions should benefit from higher available rates on deposits, certificates, and investment options. The challenge is helping them take advantage of those opportunities while managing the pressure that higher rates create elsewhere on their balance sheets.
The CU Daily: Do rising yields push down the value of existing fixed-rate assets and make liquidity more expensive?
DeBree: Yes. Higher market rates generally reduce the value of existing fixed-rate securities and longer-duration loans.
That decline can lower the base-case value of Net Economic Value and, all else being equal, increase a credit union’s overall NEV risk exposure. There is also a liquidity impact. A credit union that needs to sell securities or loan pools may receive a lower price, increasing the cost of generating liquidity. Borrowing remains an option, but that cost will also be higher.
This does not necessarily mean a credit union has an immediate problem. It does mean management needs to understand how much liquidity depends on selling assets, what those assets are currently worth, and how much borrowing capacity remains available.
The CU Daily: Can new money now be invested at higher yields?
DeBree: Yes, absolutely. Higher rates create better reinvestment opportunities, but the overall benefit will depend on each credit union’s circumstances.
The key question is whether credit unions can maintain their asset mix. If loan growth slows and funds move from loans into investments, asset yields may not improve as much as expected because investments may still earn less than the loans they replace. At the same time, deposit and other funding costs may continue to rise.
That can create pressure from both directions: a less favorable earning-asset mix and higher funding costs. As a result, market yields can rise while a credit union’s net interest margin still comes under pressure.
The CU Daily: Are there risks around duration and repricing mismatches? What is your advice?
DeBree: Yes. The primary risk is that assets and liabilities do not reprice at the same pace. If deposit and borrowing costs rise faster than asset yields, earnings can come under pressure.
On the other hand, remaining too defensive also carries a cost. Holding excessive cash or keeping the investment portfolio extremely short may protect against another rate increase, but it can also cause a credit union to miss opportunities to improve longer-term earnings.
My advice is not to build the balance sheet around a single rate forecast. Credit unions should deploy funds gradually, maintain adequate liquidity, and add duration when they are being appropriately compensated for taking that risk.
Auto lending remains challenging because of pricing pressure and competition, but opportunities may exist in home equity loans (HELOCs), selected commercial lending, and other relationship-based areas. Investments should also be viewed as a strategic part of the balance sheet, not simply as a temporary place to hold excess funds.
Credit unions should continue to:
- Monitor deposit repricing and member rate sensitivity.
- Stress-test earnings, NEV, and liquidity under multiple rate scenarios.
- Maintain and test borrowing capacity before it is needed.
- Diversify new investments across maturities and repricing structures.
- Price loans to reflect funding, liquidity, capital, credit, and interest rate risk.
- Consider floating-rate assets and shorter-reset structures where appropriate.
- Evaluate derivatives when they address a clearly identified balance sheet exposure.
The goal is not to eliminate duration. It is to make sure the duration being added is intentional, measured, and appropriate for the credit union’s liquidity, capital, and earnings position.
The CU Daily: What are Catalyst client credit unions asking?
Most of the questions we are hearing fall into four broad areas:
- How high could rates go, and how long could they remain elevated?
- How quickly should excess liquidity be deployed?
- What do higher rates mean for NEV, liquidity, and borrowing capacity?
- How should the balance sheet be positioned for the next 12 to 24 months?
These conversations typically involve deposit pricing, funding strategy, loan growth, investment allocation, duration, and the potential use of derivatives. There is no single answer that works for every credit union. The right approach depends on the institution’s current balance sheet, liquidity, deposit behavior, capital position, and risk tolerance.
The CU Daily: Is there anything else we should be considering?
DeBree: The larger issue is not simply whether rates are higher or lower. It is the uncertainty around where they go next. The greatest risk may be becoming too heavily positioned for one outcome.
If a credit union assumes rates will continue rising, it may hold too much cash and miss opportunities to add income. If it assumes rates will decline quickly, it may add too much duration and expose itself to additional market-value risk. Credit unions should prepare for several reasonable scenarios rather than trying to make one perfect forecast.
There are a few additional areas I would emphasize:
Revisit derivatives and hedging. Credit unions should identify the exposures they are willing to retain and determine whether swaps, caps, or other hedging tools could help manage the risks they do not want. Any strategy should begin with a clearly identified balance sheet exposure, not simply a view on where rates are headed.
- Focus on deposit retention and pricing. The next significant challenge may be funding rather than asset generation. Credit unions should determine which deposits are truly rate-sensitive and use targeted pricing rather than automatically raising rates across the entire deposit base.
- Strengthen scenario planning. Do not model only what happens if the 10-year Treasury remains near 5%. Consider what happens if rates rise further, fall back moderately, or decline quickly because of economic weakness. Management should understand where the balance sheet becomes vulnerable and what actions it could take in each scenario.
- Maintain loan-pricing discipline. Loan pricing should reflect the full cost of funding, liquidity, capital, credit, operations, and interest rate risk. Chasing volume without earning an appropriate risk-adjusted return can create longer-term earnings pressure.
- Look beyond net interest margin. Margin is important, but it should not be considered in isolation. Liquidity resilience, capital preservation, NEV stability, deposit retention, borrowing capacity, asset quality, member affordability, and the value of the overall member relationship all matter.
The CU Daily: Do you have any final thoughts?
DeBree: I would not characterize higher rates as entirely good or entirely bad. They create better earning opportunities, but they also increase funding costs, reduce the value of existing assets, and place additional pressure on members.
The institutions that perform best will be the ones that remain flexible, understand their exposures, and make deliberate balance sheet decisions rather than trying to perfectly time the market. Credit unions do not need to make one large bet on where rates are headed. They need to make a series of disciplined decisions about liquidity, asset deployment, deposit pricing, loan pricing, duration, and risk management.
