Pub. 10 2021 Issue 1

9 S p r i n g | 2021 2021 ICBA Bond Academy announced ICBA Securities and its exclusively endorsed broker Vining Sparks will present the ICBA Bond Academy this spring. This virtual program, scheduled for April 19-22, is designed for the entry-level portfolio manager. Attendees will learn the fundamentals of fixed-income products and strategies. Up to eight hours of CPE credit are offered. For more information, visit icbasecurities.com. Do: Take action to normalize your bond portfolio’s cash flow. As low as returns (and spreads) are, the cost of eliminat - ing optionality is at an all-time low. Case in point: a five-year non-callable agency (aka “bullet”) yields about 0.47%, which means an investor surrenders three measly basis points to remove all cash flow uncertainty. In a different sector, MBS, a similar set of dynamics is at play. In this column recently, you’ve read that “prepayment friction” pools that consist of low-balance loans can slow down refinance activity. The same outcomes can be achieved with “yield maintenance” provi- sions on multifamily MBS. Don’t: Worry (too much) about rates rising to the point that your collection of bonds is underwater from a market price standpoint. If your community bank is typical, it will benefit from a general rise in rates. For one thing, since banks own a whole lot of bonds at prices above par, interest rate increases will cause the current bonds’ yields to improve. For another, the rest of your bank’s earning assets will pretty quickly show some improvement, whether the loan portfolio consists of floaters or shorter-duration fixed-rate credits. Community banks’ asset/liability positions are built for rising rates. Do: Stay on top of your portfolio’s effective duration to put your mind at ease about all of the above. We have seen this im- portant barometer of price risk whipsaw over the last year. At last look, most portfolios had returned to their pre-pandemic Jim Reber ( jreber@icbasecurities.com ) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. duration of around 3.0 years, but that’s taken a lot of buying of a lot of longer-maturity bonds to get there. In mid-2020, they had shrunk, on average, to about 2.5 years. That’s a 20% increase in two quarters. Maybe: Invest in some bond education for your staff and you. As the economy (and travel) begins to open back up, some virtual, some live, some hybrid, will be a whole range of investment school options available. There is also plenty of archival information accumulated over the last year as trade associations, brokers-dealers and consultants have figured out digital delivery channels. So ask around your providers for offerings that may suit your needs. And by all means, do continue your due diligence and doc- umentation of your actions. Investment portfolios have grown remarkably in the last year. They are likely to be a substantial driver of bank profits for the foreseeable future. F E A T U R E Save the Date! October, 3 ‐ 5 , 2020 Roanoke, VA VACB 4 4th Annual Convention & Trade Show Hotel Roanoke & Conference Center