Independent Banker - March 2018 - 96

Nuts & Bolts
PORTFOLIO MANAGEMENT
Mind the cap
Rate caps on bonds aff ect their performance.
By Jim Reber
will rise. There can be
structures in which there is
just one step for the bond's
life or (more commonly)
multiple steps.
For the " multi-steps " in
particular, these gradually
higher coupons can be
quite restrictive. It's not
unusual to see a structure
that has a 25 basis point
(0.25 percent) annual step,
which provides almost
no relief in a rapidly rising
rate environment. So
don't be lulled into liking a
step-up that has attractive
end-of-life coupons without
providing more current
yield protection. Recently
there have been fewer
step-ups issued, as a fl attening
yield curve makes
T
ICBA
VOICE
his year will very possibly
be one in which a
nuance in bond investing
gets exposed. It seems
to me that, of the many
variables and moving parts an investor
must consider during the prepurchase
phase, the interest rate cap is one that
can be overlooked. If by the end of
2018 there are indeed another three
bumps to the fed funds rate, we could
begin to see rate caps in stark relief.
You'll recall there are two types of
rate caps: periodic and lifetime. Some
variable-rate investments, owned by
community banks, could have one,
both or neither. The periodic variety
is the maximum rate change between
adjustment periods, and the lifetime
cap defi nes the ceiling on the rate for
the lifetime of the bond. Let's take a
look at how caps stack up and important
factors to consider.
Jim Reber (jreber@icbasecurities.
com) is president and CEO of ICBA
Securities, ICBA's institutional,
fi xed-income broker-dealer for
community banks.
Moving up slowly
For many community banks, the sector
with the most restrictive caps is
the type of government agency bond
known as a step-up.
These bonds have
a stated coupon
for a stated period,
after which they
will either be called
by the issuer (Fannie
Mae, Freddie
Mac, FHLB) or
their interest rate
94 ICBA Independent Banker March 2018
it more diffi cult to build them out to
be attractive relative to traditional
callable agencies.
Sooner and later
Adjustable rate mortgage (ARM)
securities can be a mixed bag for
community bank investors. The
notion of having a security whose
yield will fl uctuate along with general
market rates sounds attractive to
many a risk-averse portfolio manager,
and they provide good cash fl ow and
liquidity, so those boxes are checked
as well.
However (have you noticed that
word appears often in columns discussing
bonds?), investing in ARMs
has several limitations. First, they
come to market with a fi xed-rate
window that can vary from three to
10 years, which means they don't
fl oat for a while. Next, when they do
begin to fl oat, many pools experience

Independent Banker - March 2018

Table of Contents for the Digital Edition of Independent Banker - March 2018

Table of Contents
Independent Banker - March 2018 - Intro
Independent Banker - March 2018 - Cover1
Independent Banker - March 2018 - Cover2
Independent Banker - March 2018 - Table of Contents
Independent Banker - March 2018 - 2
Independent Banker - March 2018 - 3
Independent Banker - March 2018 - 4
Independent Banker - March 2018 - 5
Independent Banker - March 2018 - 6
Independent Banker - March 2018 - 7
Independent Banker - March 2018 - 8
Independent Banker - March 2018 - 9
Independent Banker - March 2018 - 10
Independent Banker - March 2018 - 11
Independent Banker - March 2018 - 12
Independent Banker - March 2018 - 13
Independent Banker - March 2018 - 14
Independent Banker - March 2018 - 15
Independent Banker - March 2018 - 16
Independent Banker - March 2018 - 17
Independent Banker - March 2018 - 18
Independent Banker - March 2018 - 19
Independent Banker - March 2018 - 20
Independent Banker - March 2018 - 21
Independent Banker - March 2018 - 22
Independent Banker - March 2018 - 23
Independent Banker - March 2018 - 24
Independent Banker - March 2018 - 25
Independent Banker - March 2018 - 26
Independent Banker - March 2018 - 27
Independent Banker - March 2018 - 28
Independent Banker - March 2018 - 29
Independent Banker - March 2018 - 30
Independent Banker - March 2018 - 31
Independent Banker - March 2018 - 32
Independent Banker - March 2018 - 33
Independent Banker - March 2018 - 34
Independent Banker - March 2018 - 35
Independent Banker - March 2018 - 36
Independent Banker - March 2018 - 37
Independent Banker - March 2018 - 38
Independent Banker - March 2018 - 39
Independent Banker - March 2018 - 40
Independent Banker - March 2018 - 41
Independent Banker - March 2018 - 42
Independent Banker - March 2018 - 43
Independent Banker - March 2018 - 44
Independent Banker - March 2018 - 45
Independent Banker - March 2018 - 46
Independent Banker - March 2018 - 47
Independent Banker - March 2018 - 48
Independent Banker - March 2018 - 49
Independent Banker - March 2018 - 50
Independent Banker - March 2018 - 51
Independent Banker - March 2018 - 52
Independent Banker - March 2018 - 53
Independent Banker - March 2018 - 54
Independent Banker - March 2018 - 55
Independent Banker - March 2018 - 56
Independent Banker - March 2018 - 57
Independent Banker - March 2018 - 58
Independent Banker - March 2018 - 59
Independent Banker - March 2018 - 60
Independent Banker - March 2018 - 61
Independent Banker - March 2018 - 62
Independent Banker - March 2018 - 63
Independent Banker - March 2018 - 64
Independent Banker - March 2018 - 65
Independent Banker - March 2018 - 66
Independent Banker - March 2018 - 67
Independent Banker - March 2018 - 68
Independent Banker - March 2018 - 69
Independent Banker - March 2018 - 70
Independent Banker - March 2018 - 71
Independent Banker - March 2018 - 72
Independent Banker - March 2018 - 73
Independent Banker - March 2018 - 74
Independent Banker - March 2018 - 75
Independent Banker - March 2018 - 76
Independent Banker - March 2018 - 77
Independent Banker - March 2018 - 78
Independent Banker - March 2018 - 79
Independent Banker - March 2018 - 80
Independent Banker - March 2018 - 81
Independent Banker - March 2018 - 82
Independent Banker - March 2018 - 83
Independent Banker - March 2018 - 84
Independent Banker - March 2018 - 85
Independent Banker - March 2018 - 86
Independent Banker - March 2018 - 87
Independent Banker - March 2018 - 88
Independent Banker - March 2018 - 89
Independent Banker - March 2018 - 90
Independent Banker - March 2018 - 91
Independent Banker - March 2018 - 92
Independent Banker - March 2018 - 93
Independent Banker - March 2018 - 94
Independent Banker - March 2018 - 95
Independent Banker - March 2018 - 96
Independent Banker - March 2018 - 97
Independent Banker - March 2018 - 98
Independent Banker - March 2018 - Cover3
Independent Banker - March 2018 - Cover4
https://www.nxtbook.com/mspc/independentbanker/january2025
https://www.nxtbook.com/mspc/independentbanker/december2024
https://www.nxtbook.com/mspc/independentbanker/november2024
https://www.nxtbook.com/mspc/independentbanker/october2024
https://www.nxtbook.com/mspc/independentbanker/september2024
https://www.nxtbook.com/mspc/independentbanker/august2024
https://www.nxtbook.com/mspc/independentbanker/july2024
https://www.nxtbook.com/mspc/independentbanker/june2024
https://www.nxtbook.com/mspc/independentbanker/may2024
https://www.nxtbook.com/mspc/independentbanker/april2024
https://www.nxtbook.com/mspc/independentbanker/march2024
https://www.nxtbook.com/mspc/independentbanker/february2024
https://www.nxtbook.com/mspc/independentbanker/january2024
https://www.nxtbook.com/mspc/independentbanker/december2023
https://www.nxtbook.com/mspc/independentbanker/november2023
https://www.nxtbook.com/mspc/independentbanker/october2023
https://www.nxtbook.com/mspc/independentbanker/september2023
https://www.nxtbook.com/mspc/independentbanker/august2023
https://www.nxtbook.com/mspc/independentbanker/july2023
https://www.nxtbook.com/mspc/independentbanker/june2023
https://www.nxtbook.com/mspc/independentbanker/may2023
https://www.nxtbook.com/mspc/independentbanker/april2023
https://www.nxtbook.com/mspc/independentbanker/march2023
https://www.nxtbook.com/mspc/independentbanker/february2023
https://www.nxtbook.com/mspc/independentbanker/january2023
https://www.nxtbook.com/mspc/independentbanker/december2022
https://www.nxtbook.com/mspc/independentbanker/november2022
https://www.nxtbook.com/mspc/independentbanker/october2022
https://www.nxtbook.com/mspc/independentbanker/september2022
https://www.nxtbook.com/mspc/independentbanker/august2022
https://www.nxtbook.com/mspc/independentbanker/july2022
https://www.nxtbook.com/mspc/independentbanker/june2022
https://www.nxtbook.com/mspc/independentbanker/may2022
https://www.nxtbook.com/mspc/independentbanker/april2022
https://www.nxtbook.com/mspc/independentbanker/march2022
https://www.nxtbook.com/mspc/independentbanker/february2022
https://www.nxtbook.com/mspc/independentbanker/january2022
https://www.nxtbook.com/mspc/independentbanker/december2021
https://www.nxtbook.com/mspc/independentbanker/november2021
https://www.nxtbook.com/mspc/independentbanker/october2021
https://www.nxtbook.com/mspc/independentbanker/september2021
https://www.nxtbook.com/mspc/independentbanker/august2021
https://www.nxtbook.com/mspc/independentbanker/july2021
https://www.nxtbook.com/mspc/independentbanker/june2021
https://www.nxtbook.com/mspc/independentbanker/may2021
https://www.nxtbook.com/mspc/independentbanker/april2021
https://www.nxtbook.com/mspc/independentbanker/march2021
https://www.nxtbook.com/mspc/independentbanker/february2021
https://www.nxtbook.com/mspc/independentbanker/january2021
https://www.nxtbook.com/mspc/independentbanker/december2020
https://www.nxtbook.com/mspc/independentbanker/november2020
https://www.nxtbook.com/mspc/independentbanker/october2020
https://www.nxtbook.com/mspc/independentbanker/september2020
https://www.nxtbook.com/mspc/independentbanker/august2020
https://www.nxtbook.com/mspc/independentbanker/july2020
https://www.nxtbook.com/mspc/independentbanker/june2020
https://www.nxtbook.com/mspc/independentbanker/may2020
https://www.nxtbook.com/mspc/independentbanker/april2020
https://www.nxtbook.com/mspc/independentbanker/march2020
https://www.nxtbook.com/mspc/independentbanker/february2020
https://www.nxtbook.com/mspc/independentbanker/january2020
https://www.nxtbook.com/mspc/independentbanker/december2019
https://www.nxtbook.com/mspc/independentbanker/november2019
https://www.nxtbook.com/mspc/independentbanker/october2019
https://www.nxtbook.com/mspc/independentbanker/september2019
https://www.nxtbook.com/mspc/independentbanker/august2019
https://www.nxtbook.com/mspc/independentbanker/july2019
https://www.nxtbook.com/mspc/independentbanker/june2019
https://www.nxtbook.com/mspc/independentbanker/may2019
https://www.nxtbook.com/mspc/independentbanker/april2019
https://www.nxtbook.com/mspc/independentbanker/march2019
https://www.nxtbook.com/mspc/independentbanker/february2019
https://www.nxtbook.com/mspc/independentbanker/january2019
https://www.nxtbook.com/mspc/independentbanker/december2018
https://www.nxtbook.com/mspc/independentbanker/november2018
https://www.nxtbook.com/mspc/independentbanker/october2018
https://www.nxtbook.com/mspc/independentbanker/september2018
https://www.nxtbook.com/mspc/independentbanker/august2018
https://www.nxtbook.com/mspc/independentbanker/july2018
https://www.nxtbook.com/mspc/independentbanker/june2018
https://www.nxtbook.com/mspc/independentbanker/may2018
https://www.nxtbook.com/mspc/independentbanker/april2018
https://www.nxtbook.com/mspc/independentbanker/march2018
https://www.nxtbook.com/mspc/independentbanker/february2018
https://www.nxtbook.com/mspc/independentbanker/january2018
https://www.nxtbook.com/mspc/independentbanker/december2017
https://www.nxtbook.com/mspc/independentbanker/november2017
https://www.nxtbook.com/mspc/independentbanker/october2017
https://www.nxtbook.com/mspc/independentbanker/september2017
https://www.nxtbook.com/mspc/independentbanker/august2017
https://www.nxtbook.com/mspc/independentbanker/july2017
https://www.nxtbook.com/mspc/independentbanker/june2017
https://www.nxtbook.com/mspc/independentbanker/may2017
https://www.nxtbook.com/mspc/independentbanker/april2017
https://www.nxtbookmedia.com