Collateral Advantage The MBS Market Offers a Kaleidoscope of Opportunities Many community bankers are beginning to get serious about their bond portfolios as liquidity has normalized and rates have stayed, shall we say, buoyant. It occurs to me that the still-visible 2022-2023 selloff has created at least one byproduct that is both unusual and tangibly beneficial for future performance. Portfolio managers continue to embrace mortgage-backed securities (MBS) for several reasons. One is that MBS are loan surrogates. Since community banks are lenders by definition, the monthly cash flows are well understood and a nice fit for the balance sheet and interest rate risk. Using 600-plus banks in The Baker Group bond accounting population as a proxy, nearly half of the dollars in these portfolios are in some form of MBS: fixed- or floating-rate, straight pass-through or collateralized mortgage obligation (CMO). Each MBS pool is backed by hundreds, if not thousands, of conforming mortgages that have been underwritten to uniform standards. This allows securities to be compared with one another and for prepayment histories of given cohorts to serve as a basis for projecting future behavior. This is also one reason for the terrific liquidity in the pass-through market. There have been several lengthy periods recently when an investor in the mortgage market was limited to buying bonds with a narrow range of coupons. For much of the past 18 years or so, “small range” has been synonymous with “low.” In nine of those years, fed funds were anchored at 25 paltry basis points (0.25%). Although there isn’t a high degree of correlation between overnight rates and 30-year mortgages, when money-market yields are “accommodative” (Fed-speak), it’s not likely that longer rates are historically impressive. The Opportunity Now, as community bankers try to set up their bond portfolios to take advantage of what’s available, there is a wide range of options. One time-tested strategy is to diversify. (In fact, when is that not a good idea?) Sometimes that means the issuer name, weighted average maturity (WAM) or even the age of the pools. In 2026, it can also mean coupons. By Jim Reber, Managing Director-ICBA Relations, The Baker Group, MIBA Endorsed Vendor 24 | The Show-Me Banker Magazine
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