environment over the next year. This rate-cut assumption was driven by both the fed funds futures market and the Fed’s most recent projections. (At present, market-driven expectations are calling for about five 25-basis point cuts over 12 months, while the Fed is estimating about two.) Here are the more important average weights and measures: CURRENT MID-2024 Yield 5.26% 4.76% Effective duration 3.16 years 3.10 years Market Value 104.44 107.40 Two variables could make these projections either better or worse than actual. One is that we are assuming a parallel shift downward in the yield curve. What’s more likely to happen is steepening, by virtue of short rates reacting more in step with Fed easing, and longer rates moving less in comparison; that would mean the fixed rate pool wouldn’t appreciate in price as much. The other is that DCPC’s carry a penalty for “voluntary conversions” (refinancings, for example) for 10 years that is passed through to the investor. Since we can’t assume any penalties will actually be paid, we ignore them for this projection, although the yield could be enhanced by prepayments. As it is, most of the barbell’s yield will be maintained while the duration remains unchanged, and the positions have about a 3% unrealized gain. That’s a success. STRETCH BEFORE YOU LIFT As always, a word of advice from your trainer. These securities will probably produce very little cash flow in the early stages, especially if the pools are new. As they season, it’s more likely that the floaters will have faster prepayments, so you’ll need to monitor your positions to keep the fixed/ floating balance in place. So, if your bond portfolio is suffering from a lack of recent energy or isn’t built to run into the headwinds from the Fed’s monetary policy, take a trip to your favorite broker’s financial fitness center. A session in barbell lifting can help flex your community bank’s economic muscle. Jim Reber is the President and CEO of ICBA Securities, ICBA’s institutional, fixed-income brokerdealer for community banks. He can be reached at jreber@icbasecurities.com. 30 | INDEPENDENT REPORT
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