K DIALING IT BACK SIMPLE BONDS FIND FAVOR WITH PORTFOLIO MANAGERS IN 2024 BY JIM REBER, PRESIDENT AND CEO, ICBA SECURITIES KISS in this column does not refer to the pancakemakeup-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 relative-value 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. 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 another 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. 10 Community Banker
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