On the path to a new MSP? Whatever the case, we want to equip you to find the best MSP for your business needs (even if it’s not us). Are you on track to outgrow your Managed Service Provider? Or are they causing more pain than they’re solving? Curious? See it all in our MSP Partnership Handbook for Community Banks at: JMARK.com/rightpath COMPREHENSIVE IT SOLUTIONS Or talk to us at 844-44-JMARK. Let’s say you’re in the market for 15-year stated final MBS, and you ask your favorite brokers to show you several examples. There is currently a supply of securities with pass-through rates ranging from 1.5% up to 5%. Each incremental bump in rate will, of course, have an increase in price. Another variable you’ll notice is that the lower-coupon, deep-discount bonds were originated five or six years ago, so they have a correspondingly short WAM and average life. Spread the Wealth Another piece of good news is that even the higher coupons carry only modest premiums, especially compared with 2021. If investors are unsure of their favorite flavor, they can buy several different structures, thereby guaranteeing they will be pleased with at least some of the new purchases. (A pessimist might say they’ll be guaranteed to be displeased with some, but I’m going with the affirmative.) What is also clear is that an MBS with a below-market coupon will look very different from a “current coupon” in terms of prepayments, average lives, price volatility and, yes, yield. Currently, a 15-year 2% security is priced around eight points below par, and the lifetime prepayment speed on the entire cohort is well under 8% annually, which is very slow. (It may be helpful to know that the average homeowners’ mortgage rate was 4.4% in June 2026.) One can expect these low coupons to continue to prepay very slowly, resulting in minimal near-term monthly cash flow. Offsetting these slow speeds, the scheduled principal is beginning to throw off some cash flow, and stated final maturities are 10 years or less. If buyers are so inclined, they could layer in some 15-year MBS with, say, 5.0% coupons, which are currently priced close to par. Because the borrowers’ rates will probably be “in the money” to refinance at some point, these pools can have shrinking average lives if rates fall and more cash flow than discount pools. However, most relevant is that the portfolio will now be insulated against both rising and falling rates, and the average risk/reward metrics across the multiple pools would probably beat those of any single security currently available. Today’s lesson is that the debris of the past has created a simple-to-apply strategy: buying a wide range of coupons and, in effect, hedging your interest-rate bets. Doing so can turn the collateral damage of 2022 into your collateral advantage of 2026. Jim Reber is managing director-ICBA relations for The Baker Group, ICBA Securities’ exclusively endorsed broker-dealer. The Show-Me Banker Magazine | 25
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