What Was … For more than two decades, one of the most predictable features of high-performing bond portfolios was the sector weighting for municipal securities. When we divided the bond accounting banks into four quartiles, sorted by yield, we would consistently see that the more munis a bank owned, the higher the yields relative to the rest of the population. There was also a correlation between yield and duration. Of course, the top quartile would have the longest average lives. But that didn’t necessarily translate into greater price risk. Tax-free securities have about 80% of the price volatility of taxables due to the way in which tax-free interest rates affect market prices (which is a column for another month). The point to be made is that a higher allocation to munis translated into better relative performance. As recently as December 2021, 52% of the top quartile’s holdings were in tax-frees. Such is most assuredly not the case today. … Is No Longer By December 2023, the top quartile had an allocation to munis of 26%, or just half what it had only 24 months earlier. Some of those dollars migrated into various types of amortizing securities, but the bulk of the reinvesting went into — wait for it — treasury bonds. The numbers are quite astonishing. In the fourth quarter, fully 60% of new purchases were treasuries. They weren’t necessarily long maturities, either, as the treasury holdings, on average, had a duration of well under two years. And remember that we’re talking about the top quartile. A skeptic would suppose that the erstwhile long-duration, heavy tax-free portfolios — and their built-in yield advantage — have given up some ground to the more conservative lower quartiles. One would be even more confident of that supposition knowing that the effective duration of the top quartile has shrunk in the past two years from 4.5 years to 3.9. One would be wrong. The yield gap between quartiles one and four was 124 basis points (1.24%) in December 2021; now, the difference is 173 basis points or 1.73%. KISS in this column does not refer to the pancake-makeup-wearing, androgynous rock ‘n’ roll band from the 1970s. I’m pleased to report it’s the acronym for “Keep It Simple, Stupid.” I mean no disrespect to the readers; in fact, it’s a compliment to community bank bond buyers, who once again have demonstrated their inclination to relativevalue propositions and their ability to react quickly to changing market forces. ICBA Securities’ exclusive broker, Stifel, provides several complementary services to its stock-in-trade of debt securities for community banks. Not least is bond accounting, which more than 400 ICBA members use to document their portfolio holdings. In aggregate, these banks own more than $76 billion in bonds, so it’s a large enough sample size to reasonably suggest they represent the industry as a whole. And you might be pleasantly surprised to learn that the highest-performing banks in this group are not achieving their results through any complex, convoluted, risk-addled means. In 2024, simplicity has rewards. DIALING IT BACK Simple Bonds Find Favor with Portfolio Managers in 2024 BY JIM REBER, PRESIDENT AND CEO, ICBA SECURITIES 12 In Touch
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