Independent Banker - July 2019 - 33

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less than longer ones, at least at the outset. Finally, it wasn't
cheap to buy floating-rate bonds back then. Newly issued
adjustable-rate, mortgage-backed securities (ARMs), even
those that didn't actually float for 36 to 60 months, came to
market with 103.00+ prices.
Remember also that deposits were still cheap but becoming
harder to find, and loan demand had returned full force.
Investment portfolios were at best holding steady, if not
shrinking. A busy portfolio manager could be excused for
not focusing on adjustable-rate securities.
Up to date
It turns out that 2016 wasn't the year for interest rates
to break out. The Fed hiked rates only once, and that
was in December. Anything out on the yield curve barely
budged. The 2-to-10 slope actually steepened by 3 basis
points (0.03%). So do floating-rate buyers now wish they
hadn't thrown caution (and yield) to the wind by being
conservative?
As we may now have entered an idle phase in the current
monetary policy drama, and it's been nearly four (!) years
since the first rate hike of the cycle, we have some documentation
about the performance of our investment holdings
during this period. While the current level of short-term
rates is still far below a typical stopping-off point, we have
seen a relatively typical yield curve shape for the latter
stages of a tightening policy.
ARMs have legs
As one example of a security that could be owned by your
bank, let's examine Fannie Mae pool BM4569. It's known as
a " Mega, " which is a pool-of-pools, most of which came to
life in 2011. These pools each had a " 5/1 " structure, meaning
they had a fixed rate for five years, after which they
began to adjust annually. So, the surviving loans (which are
about 12% of the originals) have been free to float for about
three years.
During this time, the pass-through coupon on this security
has risen from 3.08% to 4.48%. Some portion of the collateral
loans will reset every month, with the " weighted average
roll " date about six months out. As this seasoned pool is now
fully indexed, it will continue to stay on market. These current
floaters have retained their value, as the coupon rate
listed above is quite attractive in today's market. These pools
can command market prices in the 104.00 range.
Glad they did
Other floaters that have stayed on market include true money-market
alternatives, such as collateralized mortgage
obligation (CMO) floaters. These will reset monthly, with
Education on Tap
Sector snapshots
ICBA Securities' exclusive broker, Vining Sparks,
publishes its Weekly Sector Update each Monday.
It provides commentary and current market
analysis on each community bank investment
sector, including ARMs, SBAs and CMOs. To
receive yours, visit viningsparks.com or contact
your Vining Sparks sales rep.
Busy July for state conventions
ICBA Securities will attend, sponsor and speak at
six ICBA state affiliates' annual conventions this
July. Visit icbasecurities.com/seminarswebinars
for a calendar of our upcoming appearances.
no annual caps. Most of these have enjoyed their coupons
improving from the low 1%s to the low 3%s. And, of course,
prime-based adjusters, namely Small Business Administration
(SBA) pools, have moved lock-step with Fed funds
through what is now nine rate hikes totaling 2.25%.
So the question remains: Have those who invested in
floating-rate securities several years ago been rewarded or
punished for being conservative? The ARM example above
Have those who invested
in floating-rate securities
several years ago been
rewarded or punished for
being conservative?
certainly demonstrates that yields will improve, and prices
can be relatively insulated against rising rates, with floating-rate
instruments. SBAs and CMO floaters have been
even more responsive to general rate changes. I would
contend that adjustables have done their job through this
part of the interest rate cycle.
Sometimes, being bold-whether in one's gastronomic
or investment choices-pays off.
independentbanker.org Q 31
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Independent Banker - July 2019

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