As you may have heard, yield spreads on traditional investments are at an all-time low. BRUCE GOETSCH National Sales Manager bgoetsch@myservion.com 651-497-4734 myservion.com We provide financial institutions and borrowers the support they need to reach their financial goals. Re-envisionyour mortgage strategy. Correspondent Retail Wholesale Delegated Conventional FHA, VA, USDA Jumbo/Non-Conforming Quality control Contract processing Contract closing Servicing Appraisal review Servion Mortgage is a DBA of Servion, Inc. NMLS #1037 Equal Housing Lender partnership channels mortgage products additional services Jim Reber (jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. one, certainly wouldn’t relish the notion of buying an agency bond versus a Treasury at these levels. In 2021, around 40% of the government-backed bonds which community banks purchased were Treasuries, according to Vining Sparks. That is by far the highest amount in decades. Hoped-for outcomes So what is the endgame for this strategy? Certainly, a bond portfolio stuffed full of zero-percent risk-weighted bonds that have no optionality really isn’t a recipe for outperforming one’s peers. There are several possibilities. One is that yield spreads widen, if not to 1990s levels, then at least to 2010s. When that happens, the most efficient bonds swaps of all time can be executed: sell a Treasury, and buy an identical-duration agency, MBS, or municipal bond. Another outcome is that the Treasury yield curve flattens (which nearly always happens when the Fed hikes rates), and the total returns on the longer Treasuries in the portfolio actually hold up very well. Most optimistically, loan demand shows up, and the investor can dump the Treasuries in short order and turn them into much higher-yielding credits. So there you have it. If you have recently considered buying Treasuries in lieu of the more traditional sectors, given the paltry incremental rewards, just know that you’d be in good company. And with any luck, you are finished reading about the wonders of U.S. Treasury securities for the next 20 years. ■ February 2022 | 21
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