a collection of bonds that are heavy on both ends of the maturity spectrum, you’ve successfully built a barbell. CLASSIC STRUCTURE Among the bonds that meet community banks’ criteria of liquidity and credit quality are those issued by the Small Business Administration (SBA). They are direct obligations of Uncle Sam, and new issue volumes continue to set records, so the SBA market continues to broaden and deepen. Two of the more visible products are 7(a) pools, which are true floating rate instruments, and Development Company Participation Certificates (DCPCs), which are fixed rate pools with long average lives. It makes logistical sense to consider them together for a barbell. For one thing, credit quality is unsurpassed. For another, one would be hardpressed to find two bonds with more disparate price-risk profiles. For still another, we can address the premium risk that attaches to the 7(a)s by pairing them with a DCPC that is available at a price near par. Finally, at this point in the rate cycle, both ends of the barbell yield much more than they would have a year ago, so an investor today has a big head start over 2022. END OF CYCLE PROJECTIONS We created a hypothetical barbell portfolio by modeling equal amounts of 7(a)s and 25-year DCPCs. For the record, the actual pools are SBA 540099 at a purchase price of 108.875 and SBAP 2023-25 D 1 at 100.00. We made note of their market values and yields as of April 30, 2023, and in a 100-basis point (1.00%) lower AT THIS POINT IN THE RATE CYCLE, BOTH ENDS OF THE BARBELL YIELD MUCH MORE THAN THEY WOULD HAVE A YEAR AGO, SO AN INVESTOR TODAY HAS A BIG HEAD START OVER 2022. INDEPENDENT REPORT | 29
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