Independent Banker - May 2024 - 26

PORTFOLIO PORTFOLIO MANAGEMENT
Rolling with the curve
An upward slope can bolster market values.
By Jim Reber, ICBA Securities
s we lurch ever closer to the
much-anticipated first rate
cut by the Fed, it dawns on me
(and perhaps you) that it's been
nearly two years that long rates
have been lower than short ones.
This is a record stretch of time for
an inversion. It has presented rate
A
risk managers with all kinds of
conundrums, and lenders, portfolio
managers and deposit gatherers
with a bunch of headaches.
Assuming we'll have some
normal curve shape soon, I'd like
to go through some fundamentals
about how this affects a community
bank's market values and
earnings. In the vernacular, it
is the phenomenon known as
" rolling down the curve, " and it
represents the natural order of the
debt security universe.
Shake, rattle and roll
There's plenty of imagery and
literature that describe rolling.
The Army's caissons keep rolling
along-same with Old Man River.
Jelly Roll and Jelly Roll Morton,
two separate people, are musicians
of very different genres. Those
who have changed jobs recently
perhaps have rolled over their
401(k)s. Thunder can roll, as can
hills and waves in the ocean.
As it pertains to fixed-income
investments, a given instrument
can see its market value increase
just with the passage of time,
given several conditions.
The main ingredient is that
short yields are lower than longer
ones. Another is that " spreads " -
which in this context means the
additional yield an investor earns
over and above a similar-maturity
treasury-don't widen after the
bond is purchased. If these two
criteria are met, that bond will roll
down the curve, and its market
price should increase.
Applying it to you
There are several reasons why this
matters. Community banks' bond
portfolios are still underwater; as
of the end of March, the average
unrealized loss was 11% of face.
Large portions of these portfolios
have plenty of room to increase
in value given a secular drop
in yields and a resumption of a
positively sloped curve.
Again, there are several reasons
for this. The first is that a bond
that's worth 85 cents on the dollar,
26 // ICBA Independent Banker // May 2024
Photo by Jan/Adobe

Independent Banker - May 2024

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Contents
Independent Banker - May 2024 - Cover1
Independent Banker - May 2024 - Cover2
Independent Banker - May 2024 - Contents
Independent Banker - May 2024 - 2
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