Independent Banker - July 2021 - 34

PORTFOLIO PORTFOLIO MANAGEMENT
to quantify precisely how much
our bond yields are infl uenced by
nonbank buyers, but it's worth a
look into global demand for the
securities that your bank quite
possibly owns. At a minimum, they
form a baseline from which virtually
all of your assets and liabilities
are priced.
In our court
Pick and roll
Multiple institutional relationships influence bond yields.
By Jim Reber, ICBA Securities
ond yields have risen and
the interest rate curve has
steepened thus far in 2021. For
all the discourse about cause and
eff ect, the most popular and logical
explanation is that the Federal
Reserve's insistence on maintaining
an easy money policy, coupled with
record fi scal stimulus, is likely
to unleash a torrent of infl ation
sometime soon. Longer-term
investors have, therefore, demanded
B
a higher return to compensate them
for the perceived greater exposure
to purchasing power erosion.
As it relates to community bank
bond portfolios, there's a lot more
at play. We've talked about tight
spreads and supply shortages in
certain investment sectors in this
column very recently, but we've
not-yet-mentioned the impact
that nondepository investors
have had. It may be a bit diffi cult
The relationship between an issuer
and investor that has the biggest
impact on domestic bond yields is
probably also the most visible. As
the Treasury's borrowing needs have
skyrocketed since 2019-and really
since 2008-it's a good thing for
you and me as obligors that we've
had a deep-pocketed buyer at the
ready. That would be the Federal
Reserve. In the current economic
environment, the two entities are
acting independently yet cohesively.
This two-player game evokes the
basketball strategy known as the
pick-and-roll. The pick-and-roll was
perfected by Hall of Famers John
Stockton and Karl " the Mailman "
Malone in the 1980s. Executed
properly, it is impossible to stop. In
shorthand, this entails the player
with the ball receiving a block, or
" pick, " from a teammate, who then
" rolls " to the basket to get a pass-
unguarded-for an easy hoop. In our
world, the Treasury department has
the ball. The Fed sets the pick, goes
to the basket and scores.
Plenty of participation
To be sure, there are a number of
entities that roll à la Karl Malone.
The Fed is, by far, the single biggest
investor in Treasury securities, but
by no means owns the majority of
our debt. In fact, as of December
2020, the Federal Reserve owned
about 19% of Treasury's borrowings.
Five years before that, the number
34 Q ICBA Independent Banker Q July 2021
Illustration by Evgenii Matrosov/Alamy

Independent Banker - July 2021

Table of Contents for the Digital Edition of Independent Banker - July 2021

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Independent Banker - July 2021 - Table of Contents
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