It’s Time To Hit the Weights PORTFOLIO MANAGEMENT how are those New Year’s resolutions going? Statistically, somewhere between a third and a half of us have resolved to lose weight in 2026. A key element of a weight loss plan is physical exercise, and a popular version of that is lifting weights. Repetition and resistance with barbells can help you achieve your goals. That is a (clever, in my view) segue into the theme of this month’s column. Whether you realize it or not, your community bank’s bond portfolio is probably one of two general structures. THE SHAPE OF THINGS A “ladder” is a collection of bonds that has relatively stable cash flows and carefully selected (and varying) maturity dates. This is a simple construct that has been proven to guarantee the investor passing grades, though probably not straight As. It’s the fixed-income equivalent of dollar-cost averaging for equities. When it’s time to add a rung to the ladder, the portfolio manager simply buys a bond that fills a hole in the maturity schedule. The other design is a “barbell,” which does not have the heavy lift that the name might connote. Barbells have material concentrations of rate repricings, or maturities, on both the short and long ends of the maturity spectrum. I think we can agree that “short” means roughly the same thing to bankers: generally, two years and less, and maybe as little as 30 days. The “long” definition is institution-specific and will be influenced by factors such as the makeup of the loan portfolio and the interest rate risk posture. Generally, the long segment will have a duration of five to 10 years. In the recent past, the shortest bonds have also been among the highest-yielding. Although we are no longer laboring through an inverted yield curve, the Fed’s patience in reducing overnight rates has kept the curve relatively flat, which means even money-market bonds have yields equal to or higher than those with much longer durations. WHEN THEY PERFORM The next question that enters one’s mind (or should) is, “Which structure is better?” As in most cases with bond management, the answer is an emphatic, “It depends.” The place to start this analysis is the shape of the yield curve. In a steep curve environment, a ladder will not only provide predictable amounts of cash flow; it will also see the individual components’ market value improve simply with the passage of time. Some of you veteran bankers will recall the term “roll down the yield curve.” The alternative is a flat or inverted yield curve. In this case, the barbell will probably have superior performance. It might be counterintuitive that long rates being compressed are a positive for a collection of bonds, but consider what else that produces: less decline in the market price vis-à-vis short or intermediate positions. Add to JIM REBER, CPA, CFA President and CEO, ICBA Securities 26 Community Banker
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