I’m going out on a limb here, but one day, mortgage rates will not only quit rising; they will actually begin to fall. When that happens, community bank bond portfolio managers will have to deal with a host of factors (most of them positive) they haven’t seen in a while, if ever. The sheer scale of the Fed’s tightening has produced a number of mortgagebacked securities (MBS) that appear to be custom-built for a flat or falling rate environment. So, let’s take a stroll around the MBS supermarket to see what’s on your favorite brokers’ shelves. Crowd Pleasers This column will focus on 15-year MBS and alternatives, as those are clearly the preference of depositories. You might find the above subheading a bit ironic, as there are precious few 15-year pools being created now. Between record-high housing prices and loan rates we haven’t seen since 2007, the average P&I payment has increased by 67% for new purchases in just 18 months. That’s taken a lot of 15-year borrowers out of the market. In fact, it’s been more than a year since there has been a net growth in that sector; recent production levels are down over 90% from the peak in April 2021. Despite the relative lack of supply, yield spreads on 15-year paper are historically wide, even though prepayment risk is low. But why are yields still attractive? Several probably temporary factors: lack of depository buyers, liquidation of several notable failed bank portfolios (which had very few short MBS pools), the debt ceiling showdown and the Fed’s winding down of its portfolio. A reasonable case can be made that spreads will begin to narrow, which sets up the 15-year sector to outperform others, mortgage-related or otherwise. Main Course Some of you will say you already have enough (too much?) exposure to 15-year pools. What’s the next best option? 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 Mortgage Analytics Monthly Stifel Mortgage Strategy produces an MBS Prepayment report monthly that is available to all ICBA members. This report contains commentary and a comprehensive look at the overall MBS market with tables, charts and graphs. To begin receiving copies, contact your Stifel rep. MORTGAGE MÉLANGE VOLATILE RATES CREATE A CORNUCOPIA OF OPTIONS By Jim Reber, President and CEO, ICBA Securities 10 NEBRASKA INDEPENDENT BANKER
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