Independent Banker - August 2018 - 38

PORTFOLIO
some insight. The table is notable mainly
for the period of time it's taken for the
curve to fl atten. The fi rst interest-rate
hike in the current phase was way back
in December 2015, which means as
of this writing, this cycle is over twoand-a-half
years old. That is more than
the entirety of the last rate-hike cycle,
which lasted from June 2004 to June
2006, and contained 17 consecutive 25
basis point (0.25 percent) rate bumps.
At the moment, we're sitting at seven
rate hikes.
There are two dynamics in play here
that were not the case in 2006, and both
of them are presenting challenges to
community bank performance. The fi rst
is that yields haven't (yet) risen enough
for portfolios to show much improvement
in income, and the second is that
tax reform has had some consequences.
Portfolio Management
By Jim Reber, ICBA Securities
The long and
grinding road
Interest rates are slowly working their way higher.
o many bond market analysts, the snapshot of interest
rates in mid-2018 displays many of the characteristics of
a mature rising-interest-rate cycle. The most obvious feature
is the flattening of the yield curve, which is of no surprise to
anyone. The table, opposite, recaps recent changes.
Depending on whom you ask, we could see some continued
T
fl attening as the Federal Reserve executes its monetary game
plan, including the wind-down of its still-swollen balance
sheet. This is especially true if infl ation bugs don't swarm
the country this summer.
Impact on your bonds
We will now get to the portion of this column that contains
38 Q ICBA Independent Banker Q August 2018
Jim Reber, CPA,
CFA (jreber@
icbasecurities.com),
is president and CEO
of ICBA Securities,
ICBA's institutional,
fixed-income
broker-dealer for
community banks
Different this time around
If you're a veteran portfolio manager,
you'll remember that your collection of
bonds was worth about 3 percent less
than you paid for them in June 2006.
That was near the peak of interest rates,
and as mentioned, it didn't take very
long to get there.
Today, investment portfolios are
more than 2 percent under water, and
there's more where that came from on
the way. True adjustable-rate securities,
such as collateralized mortgage
obligation (CMO) fl oaters and Small
Business Administration (SBA) pools,
have generally held their market values,
as would be expected, but yields aren't
yet at absolute levels that have helped
overall earnings.
More signifi cantly, as corporate tax
rates have substantially dropped this
year, municipal bond market values and
tax-equivalent yields have both declined.
Retail investors, who make up about
two-thirds of the total muni market,
have continued to support the short
end of the muni curves. The traditional
domain of institutional buy ers, which

Independent Banker - August 2018

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Table of Contents
Independent Banker - August 2018 - Intro
Independent Banker - August 2018 - Cover1
Independent Banker - August 2018 - Cover2
Independent Banker - August 2018 - Table of Contents
Independent Banker - August 2018 - 2
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