Al Dopking
Fixed Income Specialist
Treasury yields rose in December after the Federal Reserve cut interest rates for the third consecutive time, as
expected, and indicated that the pace of cuts next year is likely to slow. The US central bank lowered its target range
for the Fed Funds rate by 25 basis points (0.25%) to 4.25%-4.50%, a full percentage point decrease since their
September meeting. The Fed’s policy rate significantly influences Treasury yields, and diminishing expectations have
pushed the 10-year Treasury yield higher. On January 10, the benchmark 10-year yield was approximately 4.75%, a full
percentage point increase since mid-September.
Rate cuts are expected to slow in 2025, with most economists predicting just 50 basis points (0.5%) of easing for the
year. Forecasts for the US economy and monetary policy have shifted significantly from a few months ago when
concerns about a weakening labor market led many economists to predict a more aggressive rate reduction path in
2025. The recent interest rate sell-off reflects market concerns about the incoming Trump administration’s policies
(such as mass deportations, tariffs, and tax cuts) and their potential impact on inflation and rates.
Given the likelihood of further but limited rate cuts and the uncertainty surrounding the new administration’s fiscal
plans, investors might consider focusing on a diversified fixed-income portfolio with a 10 to 20-year duration rather
than bank deposits, money market funds, and Treasury bills. Individually selected investment-grade municipal bonds
can also provide a higher taxable equivalent yield. For example:
- A 4% tax-exempt municipal bond bought at par would equal a 6.75%
taxable equivalent yield for someone in the top tax bracket. -
A 4.5% tax-exempt municipal bond bought at par would equal a 7.625%
taxable equivalent yield for someone in the top tax bracket. -
A 5% tax-exempt municipal bond bought at par would equal an 8.375%
taxable equivalent yield for someone in the top tax bracket.
Heavy new municipal bond issuance projected for 2025 may also make them relatively cheaper compared to Treasuries.
At Suncoast Equity Management and Suncoast Prosperity Advisors, we are dedicated to understanding and meeting the evolving needs of our clients. If a determination is made that fixed income fits in your overall portfolio needs, we will do everything we can to find the highest quality and best returning bonds for you. Our unique positioning allows us to effectively address these needs. We are here to assist you with your inquiries and provide guidance in both the fixed income and equity markets. Let’s collaborate to create a comprehensive game plan.
Investment advisory services are offered through Suncoast Equity Management, LLC; a Securities and Exchange Commission Registered Investment Advisor. We will do our best to confirm the accuracy of all information that appears in this newsletter but cannot guarantee accuracy, reliability, or timeliness. All information is provided without guarantee or warranty. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the information, products, or services in this newsletter for any purpose. Any reliance you place on such information is therefore strictly at your own risk.