Independent Banker - June 2021 - 29

Next: Strategies to broaden your bank's candidate pool 
2008, demand has overwhelmed
supply, pushing down yield spreads.
They have gotten so low that some
community bank investors have
begun employing other alternatives.
Inside scoop
Many institutional investors have
actually swapped out of agencies
and into treasuries. In fact, Vining
Sparks, ICBA Securities' endorsed
broker-dealer, estimates that 25% of
the government debt purchased by
community banks in 2021 has been
treasuries, which is an enormous
sector change.
Some of these buyers may be
anticipating-or hoping-that spreads
widen out in the future and that
the ultra-liquid treasury securities
can be swapped back into other
" spread " products.
Another strategy is to buy
bonds that have maturities or call
features that are slightly longer than
benchmarks. For example, instead
of buying true fi ve-year maturity,
some investors will stretch out to fi ve
and a half years and pick up maybe
eight more basis points. Certain
The best news is that for the bonds
currently in your community bank's
investment portfolio, their market
prices have already benefited from
the " tighten up " of yield spreads.
institutional buyers are mandated
to stay specifi cally within fi ve-year
windows, which is why fractionalyear
maturities have somewhat
higher yields.
Still another strategy is to buy a
bond with one-only call date at a
price below par at a yield to maturity
higher than a bullet. The general rise
in yields for maturities beyond three
years so far in 2021 actually makes
this possible.
If the bond misses its one call date,
which is the expectation the day of
purchase, spreads will narrow to that
of a bullet, and your bond's total return
will be enhanced.
Sector flipping
Education on Tap
Webinar series continues
ICBA Securities and Vining Sparks host the next webinar in the
2021 Community Banking Matters series on June 8 at 10 a.m.
Central. Kevin Smith will present Mortgage Market Update and
Opportunities. Visit icbasecurities.com to register. One hour of
CPE credit is off ered.
Bank industry update
Vining Sparks' Marty Mosby and Tom Mecredy will present their
quarterly Bank Advisory and Strategic Services webinar on June 24
at 10 a.m. Central. Bank profitability, industry risk and the M&A
environment will be discussed. Visit viningsparks.com to register.
There are also some agency bullet
surrogates available in other investment
sectors. Some multifamily mortgagebacked
securities (MBS) have short
maturities and tight payment windows
so that cash fl ows will mimic a bullet's
cash fl ow. High-quality corporates
will always off er higher yields than
comparable agency paper, and it's up
to the buyer to perform the suitable
due diligence. It's fair to say that yield
spreads on all these options are far less
than long-term averages, so as you do
your shopping, keep that in mind.
Regardless, that incremental yield
over treasuries will be hard to come
by for the time being. The best news
is that for the bonds currently in your
community bank's investment portfolio,
their market prices have already
benefi ted from the " tighten up " of yield
spreads. Archie Bell & the Drells should
be so proud. 
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 Q 29
http://www.icbasecurities.com http://www.viningsparks.com http://www.independentbanker.org
Independent Banker - June 2021

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