principal can be used to pay back the borrowings and the higher-yielding bonds remain on the books. As market volatility has increased in recent weeks, we’ve seen a steepening of the yield curve from one-year forward. Bonds with short maturities between one and three years may be good candidates to consider for these types of strategies. With the market pricing in higher odds of a recession, there is potential that we end up in a lower rate environment sometime in the future. These bonds with one- to three-year maturities would likely have the most reinvestment risk in that scenario. It’s important to note that both scenarios may have a cost to the bank, so if you’re considering either of these strategies, the right choice could come down to how the bank prefers to “pay” for it. For a bond swap, selling bonds at a loss can be seen as the equivalent of paying interest up-front, whereas the pre-funding strategy will increase interest expense, which is paid over time. The benefits may not be immediate for either strategy, but they do allow banks to continue to reprice some of their lowest-yielding assets while avoiding reinvestment risk if we end up in a lower rate environment in the future. By identifying repricing opportunities within the bond portfolio, banks may be able to further increase the yield on earning assets. Combine this with a little help from the Fed and the industry may be able to continue margin expansion in 2025. Dillion Wiedemann Senior Vice President, Financial Strategies Group The Baker Group Dillion works with clients in a broad range of areas, including investment portfolio management, education, swap strategies and interest rate risk management. A regular speaker at the company’s various educational seminars across the country, Dillion holds a bachelor’s degree from the University of Central Oklahoma. The Baker Group is a Preferred Service Provider of the Indiana Bankers Association and an IBA Diamond Associate Member. MAY/JUNE 2025 19 Get the power of a full IT department—without the cost of expanding in-house. Our experts become an extension of your team, providing 24/7 U.S.-based support, proactive infrastructure management, and comprehensive cybersecurity to enhance your IT performance. EndeavorIT.com 833-348-0007 solutions@endeavorit.com www.hokansoninc.com Property Management & Maintenance Leasing & Brokerage Development & Project Management Construction Management Corporate Real Estate Consulting Accounting Services ▪ ▪ ▪ ▪ ▪ ▪ ALL OF YOUR REAL ESTATE NEEDS IN ONE COMPANY
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