Independent Banker - April 2023 - 33

Next: In-person advocacy opportunity 
Why are their yields now higher
than many mortgage-backed securities
(MBS), and even municipal bonds?
Let's start with the inverted yield
curve. At the moment, the two-year
treasury has 90 basis points (0.9%)
more yield than the 10-year. Many
community bank portfolios have
average durations in the " belly " of the
curve, between, say, three and seven
years. So their preferred maturities
have a head start over longer ones.
Concerning supply, the Fed still
owns a pile of MBS, over 20% of
the market, and doesn't yet seem
compelled to unload them on the
market, which is probably good
for community banks. The shorter
municipal bonds out there, five years
and less, continue to be gobbled up
by nondepositories, making the muni
curve, as usual, positively sloped.
Finally, with the big run-up in
yields last year, the agencies with
call features are much more likely
to be at some point " in-the-money "
to be redeemed early, and investors
have demanded compensation in the
In 2023, a number of securities that fall
into the non-complex category are also
among the higher yielding; specifically,
government agency bonds.
form of yield, today, so spreads are
unusually wide, today.
Add yield, deduct risk
Portfolio managers with money to
invest now likely can find an array of
shorter investments that have nice
risk/reward profiles. The trick is to
lock down these yields for the period
of time that fits your needs. Threeyear
treasuries have been hovering
around 4.25% recently; three-year
bullets have about 10 basis points
more, and a three-year callable gets
almost another full percentage point
in yield, which at the moment means
Education on Tap
Live Community Bank Conference series
ICBA Securities and its exclusive broker Stifel are presenting half-day
conferences in several locations in upcoming months. We will be in
Boston May 2; Kansas City, Mo., May 10; Denver June 21; and Atlanta
June 27. There is no cost to attend, and CPE credit is offered. To
register, visit icbasecurities.com
Banking school in May
ICBA's endorsed banking school, Barret Graduate School of Banking,
hosts its 51st session in Memphis, Tenn., May 21-26. ICBA's chief
learning and experience officer Lindsay LaNore and ICBA Securities
president/CEO Jim Reber are members of Barret's faculty. For
more information or to register, visit barretbanking.org or visit
icbasecurities.com
around 5.5% to maturity.
Contrast this with a 15-year
" current coupon " MBS. These have
15-year stated finals and will have
180 separate monthly P&I payments
until they mature. They have around
5% yields and average lives initially
around five years. A quick comparison
sees the callable agency having less
price risk and more yield. It also is
more predictable; the only variable is
whether the call option gets exercised.
There are, of course, more factors
to consider than just yield and term;
sector weightings and cash flow
are examples. Another legitimate
consideration is interest rate risk.
This column has presupposed that the
banker prefers shorter bonds, when
in fact the longer option may be more
appropriate. Still, agency bonds may
deserve a look as an alternative to
more sophisticated products without
sacrificing yield.
That leaves us to close with a quote
from the most pragmatic of investors,
Warren Buffett: " Whether we're
talking about socks or stocks, I like
buying quality merchandise when it is
marked down. "
Jim Reber, CPA, CFA (jreber@
icbasecurities.com), is president
and CEO of ICBA Securities, ICBA's
institutional, fixed-income brokerdealer
for community banks
independentbanker.org // 33
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Independent Banker - April 2023

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