Spread the Wealth 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 currently is 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 piece of good news related to this is that even the higher coupons have 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 also is 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 9 points below par, and the lifetime prepayment speed on the entire cohort is well under 10% annually, which is very slow. (It may be helpful to know that the average homeowner’s mortgage rate was 3.39% at the start of 2023.) One can expect these low coupons to continue to prepay very slowly, producing minimal monthly cash flow in the near term. If buyers are so inclined, they could layer in some 15-year MBS with, say, 4.5% coupons, which, at present, are at a slight premium. Because the borrowers’ rates will at some point be “in the money” to refinance, these pools will have shorter average lives than the discount pools and, quite possibly, higher yields. However, most relevant is that the portfolio will now be insulated against both rising and falling rates, and the average risk/reward metrics of the multiple pools would probably beat any one security currently available. Today’s lesson is that the debris of last year has created a simpleto-apply strategy of buying a historically 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 2023. Jim Reber (jreber@icbasecurities.com) is President and CEO of ICBA Securities, ICBA’s institutional, fixed-income brokerdealer for community banks. 2023 Webinar Series Continues ICBA Securities and its exclusive broker Stifel present the next installment of the 2023 Community Banking Matters webinar series on March 23 at 12 pm CST. The topic is “Solutions for a Challenging Environment.” To register, visit icbasecurities.com. Bond Academy Registration Open There are still some slots available for the ICBA Bond Academy on April 17–18, 2023, in Memphis, Tenn. Up to 11 hours of CPE credit are available. The event is hosted by ICBA Securities and its exclusive broker Stifel. For more information or to register, contact your Stifel sales rep or visit icbasecurities.com. Today’s lesson is that the debris of last year has created a simple-toapply strategy of buying a historically wide range of coupons, and in effect, hedging your interest rate bets. EDUCATION ON TAP 16 In Touch
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