Independent Banker - May 2024 - 27

Next: Keep an eye on these CFPB rules 
which perhaps was purchased
three years ago, can jump in price
even if there are embedded call
features. This describes a lot of
mortgage-backed securities owned
by community banks. It's been
well documented that the recordlow
mortgage rates of 2020 and
2021 spawned plenty of pools with
coupons as low as 1%, and borrower
rates that begin with a " 2 " handle.
In addition, as discussed last
month, there is a larger cohort
of non-callable bonds in bank
portfolios than in the past.
Three years ago, just 1% of bond
portfolios consisted of treasuries;
now, that number is fully 10%.
Treasuries are the best example of
non-callable bonds, as none can
be redeemed early-hence their
appeal in what investors sense are
higher-than-normal rate periods.
Given these conditions (in other
words, large positions of bonds
with market values well below par,
and larger positions of " bullets " ),
community banks' portfolios are
well positioned for their market
values to spike higher.
Three years ago, just 1% of bond portfolios
consisted of treasuries; now, that number is
fully 10%. Treasuries are the best example
of non-callable bonds, as none can be
redeemed early.
Practical example
First, some historical perspective.
From 1980 to the present, the
average rate on overnight fed funds
has been 4.39%, the two-year
treasury 4.79%, and the 10-year
treasury 5.68%. The average slope
on the " 2-to-10s " is 89 basis points,
or 0.89%. Each year, therefore, the
average market yield drops about 11
basis points.
For a four-year bond on
this normally sloped curve, its
progression over a 12-month period
to a three-year term would improve
the price about 0.33%, or $3,300
per $1 million face. That may not
sound like much, but remember
that math probably applies to
the entire portfolio in 2024, as
explained above. And, though we're
still inverted at the moment, there
are plenty of periods in which the
slope, particularly at the shortest
end of the curve, is steeper than
average. That would help the math
of the roll.
Education on Tap
Balance sheet webcast in May
ICBA Securities and its exclusive broker Stifel will host their
Quarterly Bank Strategy webinar on May 9 at 1 p.m. Eastern. Several
strategists and economists will make presentations, and up to 1.5
hours of CPE are off ered. For more information and to register,
contact your Stifel rep.
Virtual bond basics upcoming
Stifel will again off er a virtual bond school June 11-13 each day from
1-3 p.m. Eastern. Concepts such as rolling down the yield curve will
be discussed. Up to nine hours of CPE are off ered. Be looking for
announcements this month.
It would, of course, be folly to
predict when we'll be finished with
this abnormal yield curve shape. It's
also time to remind readers that an
upward-sloped curve has embedded
investor expectations for higher
rates in the future. That means,
by extension, a positively sloping
curve is a really poor predictor,
as rates have generally fallen in
the last 40-plus years. In spite of
these limitations, your collection of
bonds is likely poised to, as Steve
Winwood would say, " roll with
it, baby. "
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 // 27
http://www.independentbanker.org
Independent Banker - May 2024

Table of Contents for the Digital Edition of Independent Banker - May 2024
