Independent Banker - April 2024 - 32

PORTFOLIO PORTFOLIO MANAGEMENT
Dialing it back
Simple bonds find favor with portfolio managers in 2024.
By Jim Reber, ICBA Securities
What was...
For more than two decades, one
of the most predictable features of
high-performing bond portfolios
was the sector weighting for
municipal securities.
When we divided the bond
accounting banks into four
quartiles, sorted by yield, we would
consistently see that the more
munis a bank owned, the higher
the yields relative to the rest of
the population. There was also
a correlation between yield and
duration, of course; the top quartile
would then have the longest
average lives.
But that didn't necessarily
translate into greater price risk.
Tax-free securities have about 80%
of the price volatility of taxables due
to the way in which tax-free interest
rates affect market prices (which is
another column for another month).
The point to be made is that
a higher allocation to munis
translated into better relative
performance. As recently as
December 2021, 52% of the top
quartile's holdings were in taxfrees.
Such is most assuredly not
the case today.
...is no longer
ISS in this column does not refer
to the pancake-makeup-wearing,
androgynous rock 'n' roll band from
the 1970s. I'm pleased to report it's
the acronym for " Keep It Simple,
Stupid. " I mean no disrespect to the
readers; in fact, it's a compliment
to community bank bond buyers,
who once again have demonstrated
their inclination to relative-value
propositions, and their ability to react
quickly to changing market forces.
ICBA Securities' exclusive
broker Stifel provides several
complementary services to its
stock-in-trade of debt securities for
K
community banks. Not least is bond
accounting, which more than 400
ICBA members use to document
their portfolio holdings.
In aggregate, these banks own
more than $76 billion in bonds, so
it's a large enough sample size to
reasonably suggest they represent
the industry as a whole. And you
might be pleasantly surprised to
learn that the highest-performing
banks in this group are not
achieving their results through any
complex, convoluted, risk-addled
means. In 2024, simplicity certainly
has its rewards.
By December 2023, the top quartile
had an allocation to munis of
26%, or just half what it had only
24 months earlier. Some of those
dollars migrated into various types
of amortizing securities, but the bulk
of the reinvesting went into-wait
for it-treasury notes. The numbers
are quite astonishing. In the fourth
quarter, fully 60% of new purchases
were treasuries. They weren't
necessarily long maturities, either,
as the treasury holdings on average
had a duration of well under two
years. And remember that we're
talking about the top quartile.
32 // ICBA Independent Banker // April 2024
Illustration by Natalia/Adobe

Independent Banker - April 2024

Table of Contents for the Digital Edition of Independent Banker - April 2024

Contents
Independent Banker - April 2024 - Cover1
Independent Banker - April 2024 - Cover2
Independent Banker - April 2024 - Contents
Independent Banker - April 2024 - 2
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