Independent Banker - January 2025 - 32

PORTFOLIO PORTFOLIO MANAGEMENT
Make portfolio
strategy fun again
Things are looking up for portfolio management in 2025.
By Michael Benedict, Stifel
2025 will see a steeper yield curve
than the year just ended, both the
peak in curve slope and the path
interest rates take to reach that peak
will influence the decisions portfolio
managers face throughout the year.
However, given myriad historic
challenges over the past several
years-record-low interest rates,
extreme variations in liquidity
positioning and the deepest curve
inversion in 40 years, among
others-the questions faced
today may feel like a welcome
return to normal for many
portfolio managers.
s the calendar flips to 2025,
portfolio managers may find
themselves asking what sort of
opportunities the new year could
bring. While nobody has a crystal ball,
it does seem fairly clear that this year
will be different from (and hopefully
better than) the past.
With any luck, a more favorable
interest rate environment will be
a key part of that. After remaining
inverted for more than two years, the
spread between two-year and 10-year
A
Treasury notes, commonly referred
to as the " 2s/10s spread, " finally
returned to positive territory several
days before the Federal Reserve
began its easing cycle in September.
It is no secret that an inverted yield
curve is challenging for community
banks, so a re-steepening of the
curve-however modest it may
be-goes a long way toward easing
profitability pressure for many
across the industry.
Though it seems quite likely that
Cycles in the yield curve
The 2s/10s spread is one of the most
commonly cited yield curve spreads
in financial markets. There is good
reason for this: The yield on the
two-year note is largely a function of
market expectations regarding policy
decisions from the Federal Reserve,
while the yield on the 10-year note
is influenced by expectations for
longer-term economic growth and
the outlook for inflation. Because
of the factors influencing each
component, the spread between
the two provides a treasure trove of
information regarding the economy
and interest rates.
Due to its popularity, there is a
considerable amount of historical
data available on the 2s/10s
Treasury spread. Reviewing this
data shows that 2s/10s has peaked
at an average of roughly 270 basis
points (2.70%) over the past three
interest rate cycles (a period of
approximately 35 years). A closer
look at steepening episodes reveals
that these are typically driven by
severe reductions in short-term
policy rates-think 500 basis points
or more-which frequently occur
around a recession.
Given our current situation,
32 // ICBA Independent Banker // January 2025
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Independent Banker - January 2025

Table of Contents for the Digital Edition of Independent Banker - January 2025

Contents
Independent Banker - January 2025 - Cover1
Independent Banker - January 2025 - Cover2
Independent Banker - January 2025 - Contents
Independent Banker - January 2025 - 2
Independent Banker - January 2025 - 3
Independent Banker - January 2025 - 4
Independent Banker - January 2025 - 5
Independent Banker - January 2025 - 6
Independent Banker - January 2025 - 7
Independent Banker - January 2025 - 8
Independent Banker - January 2025 - 9
Independent Banker - January 2025 - 10
Independent Banker - January 2025 - 11
Independent Banker - January 2025 - 12
Independent Banker - January 2025 - 13
Independent Banker - January 2025 - 14
Independent Banker - January 2025 - 15
Independent Banker - January 2025 - 16
Independent Banker - January 2025 - 17
Independent Banker - January 2025 - 18
Independent Banker - January 2025 - 19
Independent Banker - January 2025 - 20
Independent Banker - January 2025 - 21
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Independent Banker - January 2025 - 27
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Independent Banker - January 2025 - 30
Independent Banker - January 2025 - 31
Independent Banker - January 2025 - 32
Independent Banker - January 2025 - 33
Independent Banker - January 2025 - 34
Independent Banker - January 2025 - 35
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Independent Banker - January 2025 - 37
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Independent Banker - January 2025 - Cover3
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