the banking sector has gone from too much uninvested cash, to probably about right. Again, this has removed some demand from the fixed-income markets as the banking sector has purchased very few bonds in 2023. SOME SECTORS ARE NOT LIKE OTHERS The callable agency market gives us a good example of how spreads are historically wide. Way back in 2021 (hyperbole), a bond that matured in three years and could be called in a year (“3/1 callable” in bond-speak) would have had a stated rate of interest of around 0.50%, which was about 10 measly basis points (0.10%) over the curve. Today, the “coupon” for the same bond would be around 5.50%, which has a full 1% spread over the three-year Treasury. Similarly, popular mortgage securities have improved yields and spreads today over just a few months ago. A staple of community bank portfolios is a 15-year MBS issued by Fannie Mae or Freddie Mac. A “current coupon” pool has right at a 5% yield to maturity, again around 1% over the Treasury curve. A year ago? A current coupon would have been about 3.5%, and its spread around half of today’s. It’s time to speak into the microphone and state that things can get worse before they get better. ACT NOW; THANK YOU It’s time to speak into the microphone and state that things can get worse before they get better. Which is to say, Treasury yields, and spreads, can continue to gap higher and wider before coming back in line. The Fed sure doesn’t sound like it’s finished with tightening, and even though banks are making use of wholesale funding sources to maintain liquidity levels, banks aren’t likely to become deluged with excess cash in the near future. Nonetheless, we have a baseline of yields (Treasury curve) that is at a 15-year high, coupled with spreads that are nearly unprecedented for this stage of the rate cycle. This causes me to suggest that your portfolio will thank you later for bonds you purchase in mid-2023. If more yield is considered good, then it’s summertime, and the livin’ is easy. Jim Reber is President and CEO of ICBA Securities, ICBA’s institutional, fixed‑income broker-dealer for community banks. He can be reached at jreber@icbasecurities.com. CURRENCY | 13
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