Credit unions today face a challenging fixed-income market, shaped by shifting Fed policy, persistent fiscal deficits, heavy Treasury issuance and changing market expectations. Successfully navigating this landscape means understanding these forces to make smart investment decisions, manage liquidity and position balance sheets for near-term and long-term success.

Against this backdrop, recent Treasury-market behavior reveals important signals about where yields are headed and how credit unions can adapt their portfolio strategy accordingly.

Where yields stand today

After a volatile year, the benchmark 10-year U.S. Treasury yield has been trading at an average yield of 4.06% over the last quarter of 2025. The 2-year Treasury has been yielding about 3.54%, the 5-year around 3.65% and the 30-year approximately 4.66% on average. Earlier in 2025, the 10-year yield climbed as high as 4.8%, while the 30-year hit 5.09%.

What is driving bond-market behavior

Several forces are shaping this environment:

• High term premiums and fiscal stress. Investors continue to demand higher compensation for holding longer-term government debt due to inflation uncertainty, persistent fiscal deficits and expectations for heavy Treasury issuance.
• Supply and demand imbalances. The pace of new issuance may exceed demand from traditional buyers such as foreign central banks and domestic banks, creating upward pressure on long-term yields.
• Weaker sensitivity to near-term economic data. Even when data softens, long-term yields have remained elevated, signaling that structural factors such as inflation expectations and fiscal policy risk are exerting more influence than cyclical signals.
• Shorter maturities are tied to policy expectations. Shorter-term Treasuries have moved lower in response to expectations for Federal Reserve rate cuts. Yields on 1- to 3-year securities are now more closely tied to central-bank signaling than to fiscal pressures. This divergence has contributed to a gradual steepening of the yield curve.

In effect, long-dated Treasuries are trading more like risk-sensitive instruments than traditional safe havens, while shorter maturities remain anchored to FOMC expectations.

Implications for credit unions

Investment portfolio positioning

For credit unions, the current yield environment presents both opportunities and constraints.

• Higher long-term yields create opportunities to lock in attractive income, particularly for credit unions with excess liquidity or room to extend duration. However, the elevated term premium also means greater price volatility, which can affect unrealized gains/losses and capital ratios.
• Mortgage-backed securities (MBS) remain a consideration, especially as spreads have remained wider than their long-term historical norms for much of 2025. These wider spreads provide additional yield, although they introduce prepayment and extension risk that must be managed within policy limits and IRR models.
• Callable agency bonds require careful evaluation. With consecutive Fed rate cuts in September and October and more potential rate cuts ahead, call activity has increased, which could force reinvestment at lower yields. Credit unions may benefit from selectively favoring structures with longer or limited call protection when extending duration.

Asset-Liability Management (ALM) considerations

• Interest-rate risk remains central. Even if short-term rates decline, long-term yields may stay elevated due to structural pressures. This environment can both help and hinder a credit union’s IRR position, depending on whether its balance sheet is asset-sensitive or liability-sensitive.
• Deposit behavior is shifting. After several years of rising deposit costs, credit unions may experience relief if short-term rates move lower. However, competitive pressure for deposits may persist, especially if members seek higher yields from treasury/brokerage alternatives. This affects funding stability and should be monitored in ALM stress scenarios.
• Net interest margin (NIM) dynamics may remain mixed. Lower short-term funding costs could support margins, but reinvestment risk remains if high-yielding securities mature or are called while new investments offer lower returns. Balance-sheet managers may want to blend short, intermediate and long-duration purchases, or a bond ladder, to mitigate this risk.
• Liquidity management is essential. Elevated yields on longer maturities can make it tempting to invest further out the curve, but liquidity ratios and contingency funding plans should remain top priorities, especially if deposit flows soften.

Analyst projections through year-end 2025

Bond strategists surveyed in late 2025 anticipate that 10-year Treasury yields may remain relatively flat, with an expected range of 4.03-4.06% through 2026. Short-term yields, however, may fall further as markets anticipate additional Federal Reserve rate cuts. The 2-year Treasury is forecasted to drop to 3.34% in 2026 from its current ~3.50% level. This combination points to a steepening yield curve, which has direct implications for loan pricing, deposit pricing and portfolio reinvestment strategies within credit unions.

Key factors credit unions should watch

• The size and frequency of Treasury issuance and related effects on long-term yields.
• Inflation data and its influence on rate expectations and term premiums.
• Federal Reserve policy signals, which will shape short-term funding costs.
• Called bond activity and MBS prepayment trends.

The months ahead will require disciplined balance-sheet management and a clear understanding of the forces driving the yield curve. While short-term rates may ease with further Fed adjustments, long-term yields are likely to remain influenced by broader structural pressures, creating both opportunities and risks for credit unions. By closely monitoring issuance trends, rate-cut expectations and sector-specific behaviors such as call activity and MBS prepayments, credit unions can position themselves to capture yield while protecting capital, liquidity and NIM stability.

As one of the industry's leading investment and ALM partners, Catalyst stands ready to help credit unions navigate these challenges with informed guidance, robust analytics and customized portfolio strategies. Connect with our experts to discuss how today's market landscape can support your growth and performance goals.

All securities are offered through CU Investment Solutions LLC (ISI). The home office of ISI is located at 8500 W. 110th St., Overland Park, KS 66210.  ISI is registered with the Securities and Exchange Commission (SEC) as a broker-dealer under the Securities Exchange Act of 1934.  ISI also is registered in the state of Kansas as an investment advisor. Member of FINRA and SIPC. All investments carry risk; please speak with your representative to gain a full understanding of said risks. Securities offered by ISI are not insured by the FDIC or NCUSIF and may lose value. All opinions, prices and yields are subject to change without notice.