Independent Banker - April 2024 - 33

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A skeptic would suppose that
the erstwhile long-duration, heavy
tax-free portfolios, and their built-in
yield advantage, have given up some
ground to the more conservative
lower quartiles. One would be even
more confi dent of that supposition
knowing that the eff ective duration
of the top quartile has shrunk in the
past two years from 4.5 years to 3.9.
One would be wrong. The yield gap
between quartiles one and four was
124 basis points (1.24%) in December
2021; now, the diff erence is 173 basis
points, or 1.73%.
What just happened
The reasons for the " dump munis, buy
treasuries " trade can be summarized
in these three factors:
 The shape of the curve. The
inverted curve, which has persisted
since July 2022, has made
longer-yielding bonds less attractive
than shorter ones. The longest
securities in a typical community
bank portfolio are munis, which is
a good news/bad news proposition
for inverted curves. Munis have lost
less value than others since 2022,
but the current market yields for
them are below those of lowerduration
bonds.
 The supply/demand dynamics
of the municipal market.
Munis really haven't held much
value for corporations since 2018,
when the marginal tax rates for C
Corps dropped to 21%. The retail
demand for munis has continued
apace, as individual tax rates didn't
drop as much. And fi nally, as we've
discussed in this space before, the
entire municipal bond universe has
not grown for well over 10 years.
This has pushed yields on even
10-plus year munis below those of
similar maturity treasuries.
 The " higher for longer "
narrative. Some portfolio
[A] higher allocation to munis translated into
better relative performance. As recently as
December 2021, 52% of the top quartile's
holdings were in tax-frees. Such is most
assuredly not the case today.
managers are buying into the
" higher for longer " narrative
for short-term interest rates.
The fi rst quarter of the year saw
expectations for actual cuts to fed
funds pushed into the second half
of 2024, and the number and size
of the cuts declined, too. This has
kept the inverted curve intact and
has made even money-market
treasuries the choice of engaged
portfolio managers.
The result is that the highestyielding
and more risk-averse bank
portfolios these days have a heavy
dose of short treasuries. The top
quartile at the start of 2024 had a full
14% allocation, which is a high-water
mark for the past quarter century.
As our friends from KISS might say,
community bankers can buy short
treasuries all night, and enjoy the
results every day.
Jim Reber, CPA, CFA (jreber@
icbasecurities.com), is president
and CEO of ICBA Securities, ICBA's
institutional, fixed-income brokerdealer
for community banks.
Education on Tap
ICBA Bond Academy
There are still a few slots available for the 2024 ICBA Bond
Academy, April 22-23. Learn bond basics with your peers at the
famous Peabody Hotel in Memphis, Tenn. Up to 12 CPE hours are
off ered. To learn more and register, visit icbasecurities.com
Bond accounting at your service
ICBA Securities' exclusive broker Stifel off ers an industry-leading
bond accounting package that's scalable to your community bank's
portfolio, at very competitive prices. For more information, or to see
a demo, contact your Stifel sales rep.
independentbanker.org // 33
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Independent Banker - April 2024

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