Tuesday Topic: To Realize or Not to Realize?

I posted this on LinkedIn too.  It is getting some attention there.  https://www.linkedin.com/posts/neilastanley_rob-blackwell-at-intrafi-recently-asked-activity-7311830602033283072-quEn?utm_source=share&utm_medium=member_desktop&rcm=ACoAAADcy8wBh2Dzu6T_UAs8PN4PKzB5alNfSWI

I am curious what this audience thinks?

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Neil Stanley
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Original Message:
Sent: 03-29-2025 15:19
From: Neil Stanley
Subject: Tuesday Topic: To Realize or Not to Realize?

Rob, the management of a bank's investment portfolio is a serious matter that too often has been approached very superficially and from the lens of accounting rather than finance and economics.  The bank needs to develop a thorough understanding of the economics as well as the accounting perspectives of their investment portfolio.  Too often investments have been approached as a sideline endeavor by someone who is willing to talk to the brokers and buy what they are selling.  

Here are some things to consider:

Every investment management team at the bank should understand what strategies they are employing.  Here are four broad categories:

Investment Approach	Foundational Basis
Roll down the yield curve	Positively sloped yield curve is dominant
Ladder	Dollar cost averaging
Disciplined lengthening and shortening	Effective monetary policy will keep interest rates in a band.  When rates are higher than the portfolio yields, longer-term investments should be purchased and when available yields are less than the portfolio yields, new investments should have a shorter duration.
Balance the bank	The investment portfolio just balances the financial statement – we buy bonds when we have extra cash.  (Destined to be a problem)

We should never sell an investment without understanding and declaring to all involved the give-up yield of that security.  The give-up yield is the yield that the buyer is getting.  Does the difference between the yields on the recently sold and recently purchased securities make sense?  

"Nothing good happens on a call date (unless you own the call option).  However, what happens on all the other dates might still make callables worthwhile." 

Understanding the Federal Reserve Objectives – Taylor Rule correlation between inflation and interest rates.  Real Interest Rates = Nominal – Inflation.  If real rates are too high = Recession.  If real rates are too low = Inflation.

Access Economic Data Directly from the Source: https://app.box.com/s/sjjahf3extd7runo3ebgb0j8wq26hedl 

Consider how the explosion of US Debt will affect the Federal Reserve's ability to govern interest rates now that we have lost the illusion that QE has no negative consequences.

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Neil Stanley
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Original Message:
Sent: 03-24-2025 14:41
From: Rob Blackwell
Subject: Tuesday Topic: To Realize or Not to Realize?

Banks' unrealized losses surged 32.5% in the fourth quarter amid a spike in bond yields, raising concerns about valuations, forced securities sales, and merger prospects, this article says. Many institutions are rethinking their portfolio strategies, with some opting to rip off the Band-Aid and sell underperforming securities now. As the article points out, these are complicated decisions that depend on a bank's balance sheet, growth strategy, and ability to absorb near-term financial pain. 

What are the most important considerations in determining whether to sell or hold underperforming assets? How does uncertainty over inflation and trade policy affect this calculus? Any suggestions for engaging regulators ahead of a major portfolio restructuring?

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Rob Blackwell
Chief Content Officer and Head of External Affairs
IntraFi
Arlington, VA
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