Independent Banker - March 2023 - 36
PORTFOLIO PORTFOLIO MANAGEMENT
Collateral advantage
A variety of MBS pools can spread your risk.
By Jim Reber, ICBA Securities
s many community bankers
are still picking up the pieces
from their bond portfolio's meltdown
last year, it occurs to me that the
breathtaking rise in rates has created
at least one byproduct that is both
unusual in frequency and tangibly
beneficial for future performance.
Portfolio managers continue to
embrace mortgage-backed securities
(MBS) for several reasons. One is
that they are loan surrogates. Since
community banks are lenders by
definition, the monthly cash flows are
well understood and a nice fit for the
balance sheet and interest rate risk.
A
Each MBS pool is backed by
hundreds, if not thousands, of
conforming mortgages that have been
underwritten to uniform standards.
This allows securities to be compared
with one another and for prepayment
histories on given cohorts to be a basis
to project future behavior. This also is
one reason for the terrific liquidity in
the pass-through market.
What's come to light in the wildly
volatile 2022 is that borrowers'
rates can change in a hurry. In fact,
they more than doubled last year.
" Current coupon " pools are those
new securities priced nearest to par
(100.0) on issue date each month.
They increased rapidly last year and
hit levels not seen since 2003.
For example, in January 2022, the
current coupon on 30-year agency
MBS was all of 2%. By April, it had
squared to 4%. When mortgage rates
peaked in October, a par MBS issued
by Fannie Mae or Freddie Mac was all
the way up to 6%.
The opportunity
There have been several lengthy
periods recently in which an investor
in the mortgage market was limited
to buying bonds with a small range
of coupons. For the past 15 years
or so, " small range " has been
synonymous with " low. " In nine of
those years, fed funds was anchored
at 25 paltry basis points. Although
there isn't a high degree of correlation
between overnight rates and 30-year
mortgages, when money-market yields
are " accommodative " (Fed-speak),
36 // ICBA Independent Banker // March 2023
Photo by Yaroslav Danylchenko/Stocksy
Independent Banker - March 2023
Table of Contents for the Digital Edition of Independent Banker - March 2023
Table of Contents
Independent Banker - March 2023 - Intro
Independent Banker - March 2023 - Cover1
Independent Banker - March 2023 - Cover2
Independent Banker - March 2023 - Table of Contents
Independent Banker - March 2023 - 2
Independent Banker - March 2023 - 3
Independent Banker - March 2023 - 4
Independent Banker - March 2023 - 5
Independent Banker - March 2023 - 6
Independent Banker - March 2023 - 7
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Independent Banker - March 2023 - Cover3
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