BANCMAC COMMUNITY BANC MORTGAGE CORP. YOUR COMMUNITY BANK MORTGAGE PARTNER bancmac.com mortgages@bancmac.com 888.821.7729 | NMLS# 571147 BancMac provides correspondent and wholesale lending and is your Community Bank Mortgage Partner to help your financial institution originate fixed-rate secondary market loans including: PROGRAMS • Conventional Loans • USDA Rural Development Loans • Rural Living (Hobby Farm) Loans • VA Loans • Jumbo Loans • FHA Loans OUR PARTNERS RECEIVE: • Superior Service & Competitive Pricing • No Minimum Volumes • Significant, Non-Interest Fee Income • Non-Solicit Protections & More The second action is for spreads to widen. There are both theoretical and practical explanations for this. The theory part is the mere fact that our central bank is cutting rates, which is evidence that our economy is cooling off and may be headed for a recession. If that’s true, then investors are right to demand more incremental income from borrowers who may soon be encountering solvency issues. The practice part is that, as rates fall, any bond that can be “called” (i.e., refinanced early) is more likely to be. This increased call risk, which harms investors when they purchase new bonds at lower rates, also causes investors to expect more relative return. Around 80% of bonds in bank portfolios have an embedded call feature. Call It a Draw You may be wondering: Is all this good news or bad? As in most facets of the magical world of fixed income, it’s some of both. Spread widening is bad news for the bonds that a community bank owns, as it causes prices to fall relative to risk-free assets. It’s beneficial if that same bank is looking to buy some bonds at the newly improved (meaning higher) yields. The same “win some, lose some” can be said for a steeper yield curve. The downside to a steepening yield curve is that the higher prices in the portfolio are concentrated in the shorter bonds, as that’s where most of the yield drop is felt, and bond math causes nominal price improvements to be limited. In fact, it can even happen that short rates fall while longer rates rise, in the phenomenon called a “Bear Steepener.” The upside of a steeper curve is that prices rise, and perhaps more importantly, the rest of a bank’s income picture improves. 2025 is a good testimony to this, as we finally, after more than two years, have a positive slope. Relative risk for all assets and liabilities can be properly priced, and as we have seen, the cost of financing can finally be brought under control. So ... get ready for some football, and some falling rates, just in time for fall. Jim Reber (jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. Busy Fall Ahead ICBA Securities and its exclusive broker Stifel, will attend more than 10 state association events in September and October. We appreciate the opportunity to support the many ICBA affiliates which support community banking. For a schedule of our appearances visit www.icbasecurities.com. The upside of a steeper curve is that prices rise, and perhaps more importantly, the rest of a bank’s income picture improves. The Show-Me Banker Magazine | 23
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