Clip coupons Even if you don’t own a floater, an easy-to-execute trade that will help limit your price volatility is “up-in-coupon” securities. It doesn’t matter if they’re MBS, agencies, or munis: The bigger the stated interest rate, the greater the cash flow and the lower the duration. The best example of this strategy is a tax-free municipal bond that has a big stated interest rate, or “coupon.” It’s common to see a newly hatched security with a 4% rate that comes to market at an original issue price of 120 or more. This is a quality to be embraced. For one thing, the fact that the yield is tax-free makes the security less volatile than a taxable bond. If (and when it appears) interest rates rise, the large interest payments will further help keep the value of the bond from falling off the table. Do-it-yourself There’s another way to inject floating rate securities into your bond portfolio, and that’s to build them yourself. It’s a simple task to buy and own a collection of long-duration municipal bonds — that’s how they typically come to market. A recent innovation is the ability to execute an interest rate swap to instantly, or at some designated point in the future, turn the munis into floaters. Interest rate product providers are equipped to price out transactions whereby a community bank can convert a bond, a collection of bonds, or a subsector of your balance sheet into short-duration assets that will see their yields improve every time Jim Reber (jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. March webinar to discuss rising rate strategies ICBA Securities and its exclusive broker Vining Sparks continues its webinar series, Community Banking Matters, on March 8 at 10 a.m. Central. The timely topic is “Balance Sheet Strategies in an Expected Tightening Cycle.” CPE credit of one hour is offered for each webinar. For more information, visit viningsparks.com. the Fed has a “policy adjustment.” Maybe the best news is that these transactions can now be executed in sizes that fit your community bank’s needs. How many rate hikes might we see this year? That’s the subject of myriad conversations around the board room, water cooler, and ALCOs. I’m pleased to report that investments built for rising rates can take on a variety of appearances and are fully accessible to your community bank. 13 ISSUE 2 | 2022
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