pro-rata share of all the principal repaid and prepaid, from all the loans in an MBS pool. If a security is purchased at the 97.00 price mentioned above, and some homeowners decide to cash in their chips early, the bank receives its share at 100.00, and that, too, is a yield enhancement. Unlike an agency, over time some mortgages will prepay early regardless of current market rates, as certain life events occur in any rate environment. WORTH IT? Investors are guaranteed of uncertainties regarding cash flows in a callable-heavy portfolio. It requires the manager to constantly review the upcoming call dates, as well as variables such as current versus seasoned coupons. It’s worth asking: Are callable bonds worth the trouble? I believe the investors have spoken, and their answer is “yes.” There are times when non-callable portfolios outperform those with lots of optionality, namely in falling rate scenarios. That’s why high performing portfolios in 2025 have large doses of the ultimate non-callable bonds, those being treasury notes. But in rising rate environments, callables are the winner. Here’s some free advice for those shopping for callable agencies: The yield give-up for buying a bond that’s callable one time only (“European”) versus periodically (“Bermudan” or “American”) is quite modest; in many cases less than 10 basis points (0.10%) to maturity. Add to that the current opportunity for a head start by insisting on deeply discounted bonds that were launched in the 2020-21 era, and you’ve got built-in upside. That sounds to your correspondent like a yield enhancer — and most assuredly not a gimmick. Jim Reber ( jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. CONVENTION & TRADE SHOW Big Sky Resort July 16-18, 2025 mibonline.org SAVE THE DATE! Community Banker 11
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