Endorsed Partner Bonds with bounce Floaters are gaining popularity. Again. The financial press, economic commentators and social media sites have used a collection of terms this year that convey a certain image of market values for investment securities: “Plummet,” “Underwater,” “Leaking oil,” and “Nosedive.” I think you get the picture. Community bankers have come to grips with the notion of their bond portfolios being — ahem — “submerged” in a number of ways. Most of these thoughts and actions are quite logical and, from a safety and soundness perspective, responsible. Asset/liability risk postures are still suggesting higher net interest margins. Liquidity, in the sense of the availability of short-term assets on demand, is still plentiful. Many banks are prepared for deposit runoff if that ever happens. And then, there is once again the notion that floating rate assets can actually be a salvation from a yield and price stability point of view. Reward may be returning This column, in many cases, reflects what your correspondent hears from community bankers at conventions, seminars and old-fashioned discussions. It has been a number of years since adjustable-rate bonds have appeared in this space, mainly because they have had yields or prices almost impossible for investors to like. More recently, using the outbreak of the COVID-19 pandemic as a starting point, portfolio managers were almost forced to buy fixed-rate investments to stabilize their shrinking (“plunging?”) net interest margins. This very column’s headline in December 2020 was “The One Percenters,” and it went through the progression of what it took for an investment INDEPENDENT BANKER PORTFOLIOMANAGEMENT to yield 1.0% to maturity. Trust me when I say it was not a money-market equivalent. Now, as several rate hikes are behind us and more are likely on the way, even the shortest securities are approaching yield respectability. The remainder of this column will discuss several of the more popular options, with the hope that you can find one or more that may be suitable for your own bank’s portfolio. Do we dare to say “buoyant”? Most adjustable The most rate-sensitive, and therefore price-stable, investments have these standard features: • Visible, liquid money-market index • Short reset periods • High or no interest rate caps, both periodic and life • Near-term first reset date Each of these is built into Small Business Administration (SBA) 7(a) pools. A further sweetener is that SBAs are full faith and credit instruments and 0% risk-weighted. It’s possible to buy these to effectively yield the prime rate minus 2.4%, which is the same as saying fed funds plus 0.6%. That may not sound exciting until one considers that it’s conceivable the net yield could be approaching 3% a few quarters from now. Another enticement is the market values of 7(a)s are remarkably stable. Most pricing models project that they would be down only about 2%, even in a high-rate shock environment. It must be said that many of these pools can come to market with high premium prices of 10 points or more, which absolutely creates prepayment risk to the investor. There are ways to cbak.com 8 In Touch
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