been running hot as rates are at a generational high. And the mortgage finance industry is a story unto itself. We must go back to the start of the 21st century to see refinance activity this low, and even further to 1995 to see fewer purchase applications. That’s what 7% market rates will do to a borrower base whose average current mortgage is still well below 4%. That differential is the highest in history. Where this leaves us: If community bankers were so inclined, they could find options for their bond portfolios that would look pretty good if rates were to begin trending down. The good folks at Stifel have pointed out that there can be a number of months and even quarters after the final rate hike before the first cut occurs. “Higher for longer” may be in play for 2024, and we’ve seen this movie before. Remember: The last hike was last July. Plenty To Choose From Buyers can pick just how much recession-proofing they want to build into their balance sheets. Thanks to the inverted curve, something with a four- to five-year average life will look attractive compared to longer options. And since community banks’ interest rate risk positions have returned to near-balanced postures, most depositories can buy some fixed-rate items without aggravating their asset/ liability exposures. One of the simplest options is a deep discount callable agency. These were issued in 2020 or 2021 as rates were buried near zero. The bonds themselves can have minuscule coupons (1% or even less) and prices in the low 90s. Usually, their yields to maturity will beat non-callable “bullets” by 10-12 basis points (.10%- .12%), with an enormous upside if they ever get called, which is less than likely. In the mortgage-backed securities (MBS) space, attractive offerings are plentiful. One generic example: Seasoned 20-year pools with 2.0% coupons have been available around 89 cents on the dollar and will have around 30 basis points more yield than the discount callable mentioned above. As mentioned in this space before, there is now an unusually wide range of coupons and prices in the secondary market, so investors can pick and choose their favorite risk/ reward profile. Delayed Response As the comments from the Fed members so far in 2024 have pushed back the expectations of actual rate cuts into the future, so have market rates risen modestly this year. At the time of this writing, the treasury curve has added around 40 basis points (.40%) across the maturity spectrum. What this means for buyers is that there is still additional incentive to layer in some purchases into what seems to be the waning periods before a secular shift in the economic cycle. Unless, of course, the strength of the American consumer keeps producing “three” handles in triplicate. In this case, the long-anticipated recession would be on indefinite hiatus, and significant rate cuts a conversation for future periods. And that is something you perhaps haven’t heard before. Jim Reber (jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income brokerdealer for community banks. 18 NEBRASKA INDEPENDENT BANKER
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