Independent Banker - June 2021 - 28

PORTFOLIO PORTFOLIO MANAGEMENT
with no call options embedded-in
June 2020, you would have been
off ered one with a stated interest
rate, or " coupon, " of about 0.53%.
That yield would, in fact, have
been made up of two components.
The fi rst would be the yield on
the benchmark fi ve-year Treasury
note, which at the time was about
0.33%, plus the spread that you're
entitled to for the additional risk you
assumed, which was about 20 basis
points (0.20%).
Today, that same fi ve-year bullet
yields about 0.83%. While the
nominal yield has improved, the
spread has tightened dramatically,
and an investor is only getting one
basis point (0.01%) of spread. Even
10-year bullets produce only about
fi ve basis points of additional yield.
What's causing this trend?
Tighten up
Agency spreads continue to grind lower.
By Jim Reber, ICBA Securities
ack in 1968, rhythm and blues
artists Archie Bell & the Drells
rode to the top of the charts with
their smash hit " Tighten Up. " They
probably weren't making any keen
observations about the government
agency debt market at that point.
But since I don't know Mr. Bell or
his Drells, and I didn't know there
was a bond market in 1968, that's
mere speculation. Nevertheless, they
may have hit on something currently
aff ecting your bond portfolio.
Agency bullet spreads, which
B
represent the diff erence in yield
between a risk-free asset (i.e., a
Treasury obligation) and a bond
issued by Fannie Mae, Freddie Mac
or the Federal Home Loan Banks
(FHLB), are at historic lows right
now. They've shrunk in the past
several years to the point that there is
precious little incremental yield at all.
What's a portfolio manager to do?
One year ago
If you had asked your broker to show
you a fi ve-year agency bullet-a bond
Supplies compromised
One primary reason is that the
agencies simply aren't issuing as
much debt as they have in the past.
Both Fannie Mae and Freddie Mac
have been shrinking their balance
sheets to boost their capital ratios
and lessen taxpayer exposure. Their
combined outstanding debt has
declined by $1.2 trillion, or 67%,
since 2008.
The FHLB systemwide balance
sheet had grown in recent years
but dramatically declined in 2020,
as members simply didn't need to
take down advances to fund their
operations. In just the 2020 calendar
year, FHLB borrowings dropped
$279 billion, or 27%.
So, while government-sponsored
enterprise (GSE) reform looks to be
a later-than-sooner proposition-
temporarily leaving Fannie and
Freddie intact with their nearly
explicit government backing-
and the FHLB debt collectively
is only about 60% of its size in
28 Q ICBA Independent Banker Q June 2021
Photo by Martí Sans/Stocksy

Independent Banker - June 2021

Table of Contents for the Digital Edition of Independent Banker - June 2021

Table of Contents
Independent Banker - June 2021 - Intro
Independent Banker - June 2021 - Cover1
Independent Banker - June 2021 - Cover2
Independent Banker - June 2021 - Table of Contents
Independent Banker - June 2021 - 2
Independent Banker - June 2021 - 3
Independent Banker - June 2021 - 4
Independent Banker - June 2021 - 5
Independent Banker - June 2021 - 6
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Independent Banker - June 2021 - Cover3
Independent Banker - June 2021 - Cover4
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