that the fact that the other side of the barbell will yield more than the longer-duration securities, and congratulations: Your portfolio has earned a solid B, at least. For you trivia fans, the average slope of the curve between “2s and 10s” has been a nice round 100 basis points (1%) for the past 15 years. The last time we were there was November 2021. ZERO CREDIT RISK Given the relative flatness of the yield curve and the Fed’s musings that it might be nearing the end of its easing cycle, the barbell structure could be worth a look. At the moment, a community bank could build out a barbell using two full-faith-and-credit instruments on dramatically different points of the duration spectrum. On the short end are GNMA collateralized mortgage obligation (CMO) floaters. These are repriced monthly off the money-market index known as SOFR, which is highly correlated with the fed funds rate. Depending on other variables in each security (such as life cap and margin), it’s possible to buy a floater that yields the equivalent of the fed funds rate plus 75 basis points. Recall that a flattish yield curve will be your ally: Currently, fed funds +0.75% is a higher yield than the 30-year T-bond. The long end: The Small Business Administration’s fixed-rate pools, known as SBAPs. New securities come to market monthly with 20- and 30-year fully amortizing terms. The 20-year pools in particular might suit a community bank’s cash flow and price volatility policies. As of this writing, they have a duration of about five years and yield roughly 4.50%. There’s my suggestion of a high‑protein, low-carb strategy for your early-year mental exercises. The final word on this matter comes to us from musician/actor/powerlifter Henry Rollins: “The iron never lies to you.” Community Banker 27
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