As we enter the final stretch of 2025, credit unions are making strategic shifts in their investment portfolios with the recent Federal Reserve rate cuts. After two years of rate hikes and tightening, falling interest rates could usher in a new phase of opportunity and risk, for fixed-income investments.

Fed pivot could reshape investment strategy

The Fed cut rates by 25 basis points at the September Federal Open Market Committee (FOMC) meeting, marking its first cut since 2023. Inflation has moved closer to the 2% target and economic data suggests a softening in consumer demand and loan growth. This macro environment is pushing many credit unions to reevaluate duration, liquidity, and yield strategy.

With current yields still near cycle highs, credit unions are beginning to reposition into longer-duration bonds to lock in favorable returns before rates decline. Falling rates typically boost bond prices, offering the potential for capital gains, particularly on securities purchased at higher yields.

Current bond allocation trends

As of mid-2025, credit union investment allocations grew at an annualized rate of 8.0%; outpacing loans which grew 4.4% annualized. The yield on average investments was 3.7% at the end of Q2, well above the 0.9% low of 2022. Rate hikes in 2022 and 2023 pushed investment yields higher but also created unrealized losses on existing portfolios. As rates trended lower in 2024–2025 and older, lower-coupon investments matured, these losses declined significantly:  

• Year-end 2022 – $42.7 billion Total Unrealized Losses
• Q2 2025 – $23.8 billion (44.3% decrease)
• Unrealized losses as a percentage of investments dropped from 11.4% in 2022 to 6.5% in Q2 2025.

Now, with rate cuts looming, we’re seeing a measured return to longer duration bonds, with a focus on decreasing reinvestment risk. This is best achieved by selecting bonds with limited or extended call features to manage optionality.

For Mortgage-Backed Securities (MBS), those priced at a discount and structured to hold up well in decreasing rate shock scenarios, with steady Weighted Average Lives (WAL), will perform better and avoid excessive contraction as rates decline.

With spreads still relatively tight, many credit unions are turning to U.S. Treasuries or Certificates of Deposit (CDs) to establish and maintain their ladders, while selectively adding MBS with limited prepayment risk or callable agencies with strong call protection to capture additional yield where appropriate. 

Balancing yield and liquidity

While bond investments offer important income opportunities, they also serve as a critical liquidity source. Credit unions must walk a careful line between optimizing yield and maintaining the ability to meet member needs.

Net interest margins rose to 3.32% earlier this year but may face pressure if rates fall and loan yields compress. This places more significance on proactive portfolio management to support both earnings and liquidity.

Strategies in play:

• Laddering maturities to preserve flexibility
• Gradually extending duration to benefit from rate declines
• Stress testing portfolios under multiple interest rate scenarios
• Rebalancing away from underperforming short-term instruments

With additional Fed rate cuts on the horizon, bond market conditions are shifting. Credit unions that move early to adjust duration, rebalance portfolios and maintain liquidity discipline may gain a competitive edge, not just in investment returns, but in long-term financial resilience.

As always, careful asset-liability alignment will be key. For credit unions, the bond market is once again a space where strategic action can set top performers apart.

At Catalyst, we’ve spent decades helping credit unions navigate changing interest rate environments with tailored bond market strategies and deep expertise in balance sheet management. Whether you’re evaluating duration, managing liquidity, or seeking ways to optimize yield in advance of Fed rate cuts, our team is here to guide you. Connect with your Catalyst investment officer to start a conversation about positioning your portfolio for long-term success.

All securities are offered through CU Investment Solutions, LLC. The home office is located at 8500 W 110th St, Suite 650, Overland Park KS 66210. CU Investment Solutions, LLC registered with the Securities and Exchange Commission (SEC) as a broker-dealer under the Securities Exchange Act of 1934. CU Investment Solutions, LLC 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 are not insured by the FDIC or NCUSIF and may lose value. All opinions, prices and yields are subject to change without notice. Any information contained in this email is for institutional investors only.