Higher Interest Rates

[storm]

Just got a new e-mail from LC.  This is a bit of good news for those of us who are still investing:

Higher interest rates for investors.
Hi Storm,
As you know, our goal at LendingClub is to provide value to both sides of our marketplace—access to attractive rates for borrowers, and an opportunity for competitive returns for investors.
To maintain marketplace balance, we adapt and recalibrate often based on a changing macro environment, competitive insights, supply and demand dynamics, credit performance, investor feedback and more.
In response to the changing interest rate environment and feedback from investors like you, interest rates are increasing for LendingClub grades A-E effective today, June 29, 2018, by a weighted average of approximately 50 basis points for each grade. Please see the new interest rates below and click here for additional details by subgrade.
Interest rates on the LendingClub platform are influenced by a variety of factors, including the supply and demand for credit, the competitive landscape, investor feedback, and the macroeconomic environment.
The decision to raise rates is in line with the overall interest rate environment shifting from historic lows. The Federal Reserve has increased rates 1.50% over the past two years, including a recent increase of 25 basis points on June 13, 2018. As of its June increase, the Federal Funds rate target is 1.75% to 2%—its highest level in a decade. Two additional interest rate hikes are expected this year.
As another sign of the changing interest rate ecosystem, interest rates on 10-Year Treasury Notes have increased 35% over the past 12 months. In response to and in anticipation of higher rates, our investors are looking for higher interest rates from all fixed income assets.
We will continue to monitor the interest rate environment to determine whether future increases are necessary. You can also see here for more on the factors that influence interest rates on the LendingClub platform overall.
These interest rate changes will not impact the interest rates of the LendingClub Notes you already own. However, you may want to consider these rate changes when making future investment decisions. You can easily update your investment criteria within your account.
As always, please feel free to reach out to us at investing@lendingclub.com with any questions.
Best regards,
The LendingClub Team

[Fred93]

Here's my long time LC interest rate vs time chart updated with today's rate changes.



The dots just help identify the dates on which any interest rates were changed.  From an investor's perspective, this change is overdue.

[Fred93]

To put this in perspective for investors, here's a chart of LIBOR vs time over roughly the same period.

LIBOR has gone up approximately 2% during this time. 

Has the interest rate on an LC A1 loan gone up 2%?  No.
Has the interest rate on an LC A2 loan gone up 2%?  No.
Has the interest rate on an LC A3 loan gone up 2%?  No.
...
In all cases, not even close. 

You have to get into the C/D/E/F/G loans before you see increases on that order, but there we know that something else big is going on.  The quality of LC loans in the C/D/E/F/G range deteriorated badly in 2015 & 2016, and those interest rate changes were done to compensate for increased default rates. 

[Rob L]

Wow! Time for me to jump back in   

[rawraw]

To put this in perspective for investors, here's a chart of LIBOR vs time over roughly the same period.

LIBOR has gone up approximately 2% during this time. 

Has the interest rate on an LC A1 loan gone up 2%?  No.
Has the interest rate on an LC A2 loan gone up 2%?  No.
Has the interest rate on an LC A3 loan gone up 2%?  No.
...
In all cases, not even close. 

You have to get into the C/D/E/F/G loans before you see increases on that order, but there we know that something else big is going on.  The quality of LC loans in the C/D/E/F/G range deteriorated badly in 2015 & 2016, and those interest rate changes were done to compensate for increased default rates.

Longer term rates have not risen by the same amount.  LC loans are not overnight rates - what we are feeling is just the flattening yield curve.  Now you can relate to why banks hate flat yield curves

[Fred93]

Longer term rates have not risen by the same amount.  LC loans are not overnight rates - what we are feeling is just the flattening yield curve.  Now you can relate to why banks hate flat yield curves

Your statement is mlsleading.  LC loans are not "long term" investments.  The duration of an LC loan is about 12 months.  (Weighted average time when you get your money back.)  If you want to "duration match", that would match about a 12 month bond.  12 month LIBOR has gone up just as much as 3 month LIBOR.  I only showed 3-month LIBOR because it is a more common and familiar benchmark.

Nothing involving LC has anything to do with "long term" rates (ie 10 year, 20 year, etc.)

For investors, the competing instruments of similar duration have gone up about 2% over the last couple of years, and LC loans have not.

[rawraw]

I didn't know you were a bank? From what I recall of when they disclosed the pricing formula years ago, LC pricing is based off of CD rates.  CD rates are a fine proxy for competitive investments to me

https://fred.stlouisfed.org/series/CD12NRNJ

And why haven't CD rates gone up? Well, I suspect the yield curve has something to do with banks hesitation.  And I doubt they'll compete until the money supply starts to shrink.

Basis risk is always a risk in investing in fixed income

[Fred93]

I didn't know you were a bank? From what I recall of when they disclosed the pricing formula years ago, LC pricing is based off of CD rates.  CD rates are a fine proxy for competitive investments to me

https://fred.stlouisfed.org/series/CD12NRNJ

While I normally trust data from the fed, that particular data series makes no sense at all.

You can check CD rates easily via the web.  Try bankrate.com for example, or check via your broker's web site.  One year CD rates are now around 2.3%, ie have gone up about 2% in the last couple of years.  The fed series you quote appears to be a mix of CD and DEPOSIT rates, and deposit rates haven't gone up, which pollutes the result.

You could look at this fed data series, which represents the reality I see.
https://fred.stlouisfed.org/series/IR3TCD01USM156N

Same as T-bills, LIBOR, and all other measures of rates at the short term end of the scale.

And why haven't CD rates gone up?

But they have gone up. 

The only thing that hasn't gone up is DEPOSIT rates.  Deposit rates are stuck just because banks are slow to raise rates on deposit accounts, because they don't want to do that until the customers complain, and most of the deposit account customers aren't watching rates, so are ignorant of the ripoff in process.

[Rob L]

Goldman Sachs increased its rate and joined the 3% / 5 year CD club last Tuesday:
https://www.depositaccounts.com/banks/marcus-goldman-sachs/offers/

There is now a fairly large 3% / 3year CD club. All the large well known names are at 2.55%.

Synchrony Bank increased it's 14mo CD rate to 2.45% on June 19.
https://www.depositaccounts.com/banks/synchrony-bank/offers/

One bank is offering a 2.05% savings account. Goldman Sachs is at 1.80%. The other well known names are at 1.75%.

As individual investors we have to decide for ourselves the additional return we require from holding LC notes when compared to the lower risk alternatives available. For a list of the risks associated with investing in LC notes refer to the prospectus. For projected LC returns, who knows.

[jheizer]

Really. With my purepoint savings up to 1.9% it's a rather nice place to park money now a days.

[SLCPaladin]

I agree with Fred's insights here 100%. Several banks and credit unions in my area are offering 3.25% CDs/share certificates. Lending Club's interest rate hike is better than a sharp stick in the eye, but it is not enough for me to jump back in. I think I would need a bit higher rate to compensate for the perceived risk I feel at this point in the business cycle and the taxable disadvantage of note charge-offs.

[Reginald]

Lending Club's interest rate hike is better than a sharp stick in the eye, but it is not enough for me to jump back in. I think I would need a bit higher rate to compensate for the perceived risk I feel at this point in the business cycle and the taxable disadvantage of note charge-offs.

In my humble opinion, LC should be compensating investors at least and extra 50 basis points for every 25 basis points (or more) Fed Funds Rate hike, when you add in the risk of unsecured, partially-vetted loans. They also should start reporting on the surge in late payments and  chargeoff's since 2015. I have no real evidence of the risk levels decreasing despite LC's insistance on their having increased dilligence. In fact, my own experience is the newer vintages are worse, and therefore deserve even more interest increases for the added risk. The new website interface makes it harder to track performance than ever. After taxes, its ugly and non-sustainable for retail investors.

[Reginald]

FYI I'm pulling money out of my LC account as the loans either pay off early or charge off. I am then building a 3 year CD ladder with the proceeds. I'm betting on this beating LC's "solid returns" before and after taxes by a big margin.