Navigating Reinvestment Amidst Market Uncertainty
The Federal Reserve held the federal funds rate steady for the third consecutive time at the April 2026 FOMC meeting. According to the CME Group, as of May 8 market participants see the current probability of a rate change at around 30% through January 2027. Contrary to previous months, the market is also now conflicted about whether the next change will be a rate cut or rate increase. The uncertainty is being fueled by inflationary pressures, heightened international political and trade conflicts, and the Federal Reserve’s vocal opposition to their previous plan of interest rate easing this year. Without good expectations for the next Fed rate decision, it becomes difficult to predict where the rest of the yield curve is headed.
For tax-exempt borrowers making decisions about the reinvestment of bond proceeds within their debt service reserve funds, having a stance on where rates are headed can be a determining factor. With the positive sloping yield curve, it can be enticing to lock in a longer fixed rate investment – but that comes with more risk. Debt service reserve funds are typically subject to monthly or semi-annual mark-to-market valuations, and longer dated investments are subject to greater price volatility due to interest rate fluctuations. For larger reserve funds in particular, the possible deficiencies required to be funded under an indenture could be a non-starter for certain borrowers. Below is a sample volatility matrix for possible deficiencies on various investment maturities for a $20M DSRF valued semi-annually, based on current rates and future interest rate increases of 25, 50, and 75 basis points across the curve.
Blue Rose assists many clients with the decision-making process for DSRF investments. We’re seeing more and more clients request us to advise them on how to reinvest proceeds within the same DSRF once the current investment matures. Because of this, we now offer ongoing reinvestment advisory services. Rather than hire an advisor on each transaction, clients will benefit from us monitoring their DSRF investments and proactively reaching out ahead of a rollover maturity date.
Georgina Walleshauser, Vice President | 952-746-6036
In her role of Vice President, Georgina Walleshauser manages a number of the firm’s clients, providing them with advice on and ensuring a smooth closing for all types of debt and derivative product transactions, capital planning solutions, and detailed credit assessments. Ms. Walleshauser serves as an advisor to public and private higher education, non-profit and governmental institutions. She specializes in analyzing and assessing reinvestment strategies for clients, leading most of Blue Rose’s reinvestment transactions. Ms. Walleshauser has vast expertise in providing modeling, analytics, market data, and research in support of the delivery of capital planning, debt and derivatives advisory, and reinvestment services to our clients. She joined Blue Rose in 2017 as a Junior Quantitative Analyst.
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