WHERE COMMUNITY BANKS BANK Member FDIC Scan to call now Traci Oliver Eric Hallman Tara Koester As a bankers’ bank we strive to help with every level of service and expertise, covering anything from loan participations, merchant services, ATM/debit and much more. We aim to answer your questions with, “…yes, we can do that too!” www.bbwest.com Bankers’ Bank of the West Currently, a 15-year 2% security is priced around 9 points below par, and the lifetime prepayment speed on the entire cohort is well under 10% annually, which is very slow. (It may be helpful to know that the average homeowner’s mortgage rate was 3.39% at the start of 2023.) One can expect these low coupons to continue to prepay very slowly, producing minimal monthly cash flow in the near term. If buyers are so inclined, they could layer in some 15year MBS with, say, 4.5% coupons, which, at present, are at a slight premium. Because the borrowers’ rates will at some point be “in the money” to refinance, these pools will have shorter average lives than the discount pools and, quite possibly, higher yields. However, most relevant is that the portfolio will now be insulated against both rising and falling rates, and the average risk/reward metrics of the multiple pools would probably beat any one security currently available. Today’s lesson is that the debris of last year has created a simple-to-apply strategy of buying a historically wide range of coupons and, in effect, hedging your interest rate bets. Doing so can turn the collateral damage of 2022 into your collateral advantage of 2023. Jim Reber (jreber@icbasecurities.com) is President and CEO of ICBA Securities, ICBA’s institutional, fixed-income brokerdealer for community banks. Today’s lesson is that the debris of last year has created a simple-to-apply strategy of buying a historically wide range of coupons and, in effect, hedging your interest rate bets. NICBONLINE.COM 19
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