Gear Up Your Portfolio for 2025

Even as the election is behind us, a few “policy” unknowns and what seems to be a strong economy has caused rates to trend higher. However, for the “old-school” banker, a common theme exists yet again for 2025. As the shape of the yield curve is now more positively sloped, it gives us ample opportunity to execute those familiar bond swaps in January. Rates have backed up roughly 60 basis points since November and the 3mo-10yr part of the curve is normalizing, assuming another Fed cut is coming later this month.  Laying the groundwork now to execute early in 2025 mitigates the longer payback period. The longer you wait, the less payback period you have to get your loss back in the same calendar year. If you’re having a good 2024 (positive gains/earnings), it’s possible to make your “earn-back” even shorter. Look to harvest the comfortable losses and lowest coupon/book yields, most likely in the 1-3% range. Given the tightening in some credits, losses on the books have likely improved in 4Q.

We suggest targeting sell candidates in the 2-3yr durations in Muni with coupons 3% or less and MBS (Pools, CMOs, ARMs) that are paying at historically slow speeds. In regards to the buy-back, banks are likely to be looking to add shorter duration as opposed to those longer duration adds while experiencing an inverted curve. Re-investing back into current Muni and MBS at 5-5.5% book yields is very attainable. Continued normalization of the yield curve should force spreads to tighten further creating an opportunity for capital gains.

Executing bond swaps early in January could very well mean earning back any losses within 12-24months. This “old-school” point of view is far more palatable on a breakeven basis compared to 24-36 months we experienced with an inverted curve. Let us run HEAT MAPS on your portfolio to identify the best sell candidates. Additionally, we can calculate your breakeven on our SWAP ANALYSIS with reinvestment rates putting your portfolio in a position to work for you as we begin the new year. Preparing now puts you in the driver’s seat to take advantage of the opportunities as they arise.

Please reach out to your Country Club coverage to discuss your objectives/goals and the right bonds for re-investment to see what strategy fits you best.