The stock market had an uneven month that started strong, then weakened in the middle, then strengthened towards the end, only to close on a weak note as President Trump announced a new Federal Reserve Chairman nominee. The S&P 500 appreciated 1.36%, while the Dow Jones Industrial Average gained 1.72%. The tech-heavy NASDAQ Composite index lagged, gaining 0.94%. The 10-year U.S. Treasury ended the month higher, finishing at 4.23%, and bears are monitoring as we go through the year. We are very pleased with this month’s performance and believe we are well-positioned this year.
President Donald Trump’s nomination of former Fed Governor Kevin Warsh to succeed Jerome Powell as Federal Reserve Chair has triggered market reactions indicating that investors view him as inflation-sensitive, despite his recent dovish remarks. After the confirmation on January 29, 10-year U.S. Treasury yields rose by 4 basis points, the dollar strengthened by 0.5%, and risk assets fell. Warsh’s tenure from 2006 to 2011 is marked by a focus on inflation concerns over growth, even during crises like the 2008 collapse. His opposition to quantitative easing and call for reducing the Fed’s balance sheet may have contributed to rising bond yields. This leadership change could allow Trump to reshuffle the Board of Governors with his own appointees. While Warsh’s recent op-ed expressed optimism about managing inflation under Trump’s policies, the market remains skeptical about his hawkish stance, viewing his appointment as a signal for tighter monetary policy ahead, which contrasts with the president’s desire for lower interest rates.
A situation we have discussed a few times over the last year is the steepening of the yield curve, and how the longer end could remain stubbornly high despite several rate cuts from the Fed. Over this same time period, we have received a few questions as to why that is and what the ramifications are for us. First and foremost, the long end of the yield curve is remaining at an expensive level due to growing pressure on U.S. government finances. Currently, for every five dollars collected in tax revenue, one dollar goes to interest on the national debt, amounting to about $3.5 billion per day. This significant debt service creates a price-sensitive environment for Treasury issuance. Compounding this is the refinancing challenge: around $10 trillion of government debt, or one-third of all outstanding debt, is maturing in the next 12 months. This creates a substantial supply overhang in the market. Notably, the Treasury has shifted its issuance toward the short end, with T-bills now constituting 22% of total debt and 85% of gross Treasury issuance. While this approach provides flexibility, it leads to heavy short-term supply, maintaining pressure on the short end of the yield curve, which steepens as the long end remains more stable. On the demand side, foreign ownership of Treasuries has fallen to about 25%, down from 33% a decade ago. Japan has increased its holdings, while China has reduced them, changing the dynamics of foreign demand. Auction metrics show that, although overall demand is solid, there’s a concerning decline in indirect bidding, often signaling reduced participation by foreign central banks. Additionally, money market funds have not seen significant declines in inflows, suggesting that cash is less sensitive to interest rates and isn’t flowing into longer-term Treasuries as expected.
In summary, these factors create an environment for curve steepening, with heavy short-term supply, weaker demand from foreign buyers, and a large cash pool remaining on the sidelines. This situation suggests that short-term rates may stay high while long-term rates remain stable, widening the spread between them. For our portfolios, it’s crucial to be selective in duration positioning and closely monitor Treasury demand, particularly from foreign institutions, as this trend may persist until we see changes in issuance or renewed interest from buyers in longer durations. The steepening of yields is also beneficial for our banking positions.
Please see the following updates on existing positions held at the firm:
Coterra Energy (Ticker: CTRA)— Coterra Energy is exploring an all-stock merger with Devon Energy, potentially one of the largest oil and gas deals in recent years. This could create significant value for shareholders, especially given their complementary positions in the Permian Basin. While the stock has risen on favorable speculation, the discussions are still early, and other interested parties may emerge. Shareholders should view this situation as a potential opportunity rather than a certainty. The urgency for a transaction may be heightened by previous concerns about Coterra’s mixed oil-and-gas profile and activist pressure. Ultimately, the deal’s structure and terms will determine where value accrues, either to Coterra or to Devon investors.
Eagle Point Income Company Series B Term Preferred (Ticker: EICB)— On the last day of 2025, our Series B term preferred belonging to Eagle Point Income Company was called. We were disappointed to lose such an attractive early, but it makes sense for the well-capitalized fund to redeem this fairly expensive preferred early (coupon rate was 7.75%). Overall, the investment generated a 7.5% annualized rate of return for the short time that we had it. We continue to maintain well-sized positions in sister term preferred shares: EICA and EICC. Upon the early redemption of EICB, we project the asset coverage ratio to be around 280%. We continue to feel very comfortable with our remaining positions in the sister preferred shares.
Private Bancorp of America (Ticker: PBAM)— Private Bancorp of America (PBAM) delivered strong fourth-quarter 2025 results, supported by a 19 basis point expansion in net interest margin to 4.84%, driven by deposit repricing in response to Federal Reserve rate cuts. The company achieved full-year 2025 net income growth of 13.5% year over year, with tangible book value per share rising 19.1% to $45.75, demonstrating effective capital management and strong profitability relative to a $2.54 billion asset base. Core deposits grew a robust 13.9% year-over-year to $1.89 billion, while total cost of deposits declined 23.7% year-over-year to 1.80% for the quarter, reflecting management’s proactive approach to liability management in a declining rate environment. PBAM continues to outperform peers with top-tier efficiency metrics (48.46% ratio), industry-leading returns on assets and equity among sub-$5 billion banks, and is well positioned for continued growth despite modestly elevated provision expenses reflecting credit normalization.
Eagle Financial Services (Ticker: EFSI)— Eagle Financial Services reported a solid Q4 with a net income of $4.3 million and returns of 0.91% on assets and 9.18% on equity. Higher compensation and a significant cash outflow impacted results as they invest in growth. Credit quality remains strong, with nonperforming assets stable at 0.77% of total assets, and improved net interest margin at 3.61%. Non-interest income rose to $5.4 million, driven by a 25% increase in wealth management fees. While the efficiency ratio increased to around 70%, management anticipates improvements in 2026. Loan growth was positive, with a $13.1 million portfolio expansion and a robust loan pipeline exceeding $100 million year over year. Management is optimistic about organic growth and potential M&A opportunities, supporting a constructive outlook for the company.
As we begin the new year, if you have any questions, please feel free to reach out!
Best regards,
Stash J. Graham