Positioning for Multiple Outcomes: Portfolio Management When the Outlook Is Unclear
By Jonathan Jackson, CFA, FRM, Manager of Brokerage Services, Catalyst
The path of the economy and interest rates is uncertain. Credit unions are navigating an environment in which inflation, Federal Reserve policy, geopolitical risks, energy prices, labor-market conditions, consumer health, and long-term interest rates could each move the outlook in a different direction.
Will the Federal Reserve need to raise rates to contain inflation? Can the labor market remain resilient? Will oil prices continue to rise? How will geopolitical risks affect economic growth? Perhaps most importantly for investment managers, will long-term interest rates continue moving higher?
These questions matter, but building an investment portfolio around one confident answer can create more risk than it removes. In an uncertain environment, stability is generally more valuable than perfect market timing.
Avoid Relying On a Single Rate Forecast
Economic forecasts provide useful context, but no forecast should become the sole foundation of an investment strategy. A portfolio positioned for only one interest-rate outcome may perform well if that scenario materializes, but it could leave the credit union with limited flexibility if conditions develop differently.
A more resilient approach is to position the portfolio for several plausible rate paths. Credit unions can accomplish this by building maturity buckets rather than concentrating purchases in one area of the yield curve. Maintaining an appropriate allocation to cash, short-term securities, and floating-rate instruments can preserve liquidity, while selectively adding duration may allow the portfolio to capture attractive longer-term yields.
Security selection should also go beyond nominal yield. When evaluating mortgage-backed securities and callable investments, managers should consider risk-adjusted spreads, expected cash flows, optionality, and performance under different rate scenarios. Predictable cash flows can provide liquidity, support reinvestment, and create more opportunities to reposition the portfolio as market conditions change.
Be Proactive, Not Paralyzed
Holding additional liquidity may be appropriate during uncertain periods, but that does not mean the credit union must sit on the sidelines. A better approach is to identify a target level of liquidity and actively manage toward it throughout the rate cycle.
Once that target is set, funds above the required liquidity level can be invested intentionally. Waiting for complete economic clarity may feel conservative, but it can also reduce income and create reinvestment risk. By the time the outlook appears certain, the most attractive opportunities may have already changed.
Proactive portfolio management also involves regularly reviewing existing holdings for restructuring opportunities. Higher long-term rates may create opportunities to adjust duration, increase income, or reposition securities that no longer support the credit union's objectives.
Scenario analysis is equally important. Portfolios should be tested against rising and falling rates, yield-curve steepening and flattening, and potential liquidity outflows. The goal is not to predict the exact scenario that will occur. The goal is to identify vulnerabilities before market conditions expose them.
Investment decisions should also connect to the credit union's broader funding strategy, including deposit repricing, borrowing costs, contingent funding capacity, and expected loan cash flows. Portfolio strategy is most effective when it is managed as part of the total balance sheet.
Consider a Barbell Portfolio
A barbell portfolio can work particularly well when the direction of rates is unclear. This approach combines short-term, highly liquid investments with an allocation to longer-term securities, while placing less emphasis on intermediate maturities.
The short end provides liquidity and reinvestment flexibility. As investments mature, the credit union receives recurring opportunities to respond to changes in interest rates, loan demand, deposits, and funding needs.
The long end allows the portfolio to capture the additional yield available farther out the curve. Together, the two sides can provide a useful balance between current income and future flexibility. The appropriate allocation will depend on each credit union's liquidity position, deposit composition, borrowing capacity, loan pipeline, risk limits, and income objectives.
Build for Resilience
Uncertainty does not require inaction. It requires discipline. Rather than making a large bet on one economic forecast, credit unions can maintain intentional liquidity, diversify maturity exposure, favor understandable cash flows, stress the portfolio across multiple scenarios, and remain prepared to act when opportunities arise.
A proactive, barbell-oriented strategy doesn't eliminate risk, but it can help preserve optionality. Credit unions that build portfolios around resilience rather than perfect timing will be better positioned to respond as the economy and interest-rate environment evolve.
Looking for guidance in today's uncertain market? Catalyst's brokerage experts can help you evaluate your portfolio, identify opportunities, and position your balance sheet to perform across a wide range of economic and interest-rate environments. Contact our team to start the conversation.
ABOUT CATALYST
Catalyst, one of the nation's largest corporate credit unions with approximately $6.5 billion in assets and over 1,200 member and client relationships, delivers innovative payment, asset management and liquidity solutions to credit unions nationwide. At Catalyst, we are passionate about bringing vision to life, helping credit unions grow and better serve their members every day. Discover why thousands of credit unions choose Catalyst: catalystcorp.org.
