What Just Happened The reasons for the “dump munis, buy treasuries” trade can be summarized in these three factors: 1. The shape of the curve: The inverted curve, which has persisted since July 2022, has made longer-yielding bonds less attractive than shorter ones. The longest securities in a typical community bank portfolio are munis, which is a good news/bad news proposition for inverted curves. They have lost less value than others since 2022, but the current market yields for them are below those of lower-duration bonds. 2. The supply/demand dynamics of the municipal market: Munis really haven’t held much value for corporations since 2018, when the marginal tax rates for C Corps dropped to 21%. The retail demand for munis has continued apace, as individual tax rates didn’t drop as much. And finally, as we’ve discussed in this space before, the entire municipal bond universe has not grown for well over 10 years. This has pushed yields on even 10-plus-year munis below those of similar maturity treasuries. 3. The “higher for longer” narrative: Some portfolio managers are buying into the “higher for longer” narrative for short-term interest rates. The first quarter of the year saw expectations for actual cuts to fed funds pushed into the second half of 2024, and the number and size of the cuts declined, too. This has kept the inverted curve intact and has made even money-market treasuries the choice of engaged portfolio managers. The result is that the highest-yielding and more risk-averse bank portfolios these days have a heavy dose of short treasuries. The top quartile at the start of 2024 had a full 14% allocation, which is a high-water mark for the past quarter century. As our friends from KISS might say, community bankers can buy short treasuries all night, and enjoy the results every day. Jim Reber (jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. Education On Tap Bond Accounting at Your Service ICBA Securities’ exclusive broker, Stifel, offers an industry-leading bond accounting package that’s scalable to your community bank’s portfolio at very competitive prices. For more information or to see a demo, contact your Stifel sales rep. FMSI www.fmsiconsulting.com 913.955.3355 FMSI is a small business founded and located in Kansas, specializing in assisting community banks to succeed, a mission consistent with core CBA values. We have partnered with community banks for nearly 25-years providing core advisory services including asset/ liability, investment, and liquidity management. FMSI advisors actively assess market conditions and bank balance sheets of different size, mix, and capital levels. Market conditions are constantly changing presenting opportunities and challenges for CBA member banks. Interest rates are increasing for the first time in nearly a decade and now is a perfect time to partner with a trusted, industry leader. Establishing an FMSI relationship provides confidence your bank is optimizing the balance sheet, deploying necessary strategies, maximizing profitability, and managing balance sheet risks. FMSI is a Kansas CBA Endorsed Provider 13 In Touch
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