Independent Banker - November 2023 - 34

PORTFOLIO PORTFOLIO MANAGEMENT
Mortgage mélange
Volatile rates create a feast of MBS options.
By Jim Reber, ICBA Securities
'm going out on a limb here, but
one day, mortgage rates will not
only quit rising; they will actually
begin to fall. When that happens,
community bank bond portfolio
managers will have to deal with a host
of factors (most of them positive) they
haven't seen in a while, if ever.
The sheer scale of the Fed's
tightening has produced a number of
mortgage-backed securities (MBS)
that appear to be custom-built for
a flat or falling rate environment.
So, just in time for Thanksgiving,
let's take a stroll around the MBS
supermarket to see what's on your
favorite brokers' shelves.
Crowd pleasers
This column will focus on 15-year
MBS and alternatives, as those are
clearly the preference of depositories.
You might find the above subheading
I
a bit ironic, as there are precious few
15-year pools being created now.
Between record-high housing prices
and loan rates we haven't seen since
2007, the average P&I payment has
increased by 67% for new purchases
in just 18 months.
That's taken a lot of 15-year
borrowers out of the market. In fact,
it's been more than a year since there
has been a net growth in that sector;
recent production levels are down
over 90% from the peak in April 2021.
Despite the relative lack of supply,
yield spreads on 15-year paper
are historically wide, even though
prepayment risk is low. But why are
yields still attractive? Several probably
temporary factors: lack of depository
buyers, liquidation of several notable
failed bank portfolios (which had very
few short MBS pools), the debt ceiling
showdown and the Fed's winding
down of its portfolio.
A reasonable case can be made
that spreads will begin to narrow,
which sets up the 15-year sector to
outperform others, mortgage-related
or otherwise.
Main course
Some of you will say you already have
enough (too much?) exposure to 15year
pools. What's the next best option?
For the past few months, mortgage
strategists from Stifel have been
suggesting hybrid adjustable rate
mortgage (ARM) pools. These securities
have a " fixed-to-float " structure, and
the investor can pick the term of fixed
period from three to 10 years. With
the inverted yield curve, the shorter
" roll date " securities have higher initial
yields and lower effective durations,
both of which bargain hunters seek.
Many other measures of relative value
34 // ICBA Independent Banker // November 2023
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Independent Banker - November 2023

Table of Contents for the Digital Edition of Independent Banker - November 2023

Contents
Independent Banker - November 2023 - Intro
Independent Banker - November 2023 - Cover1
Independent Banker - November 2023 - Cover2
Independent Banker - November 2023 - Contents
Independent Banker - November 2023 - 2
Independent Banker - November 2023 - 3
Independent Banker - November 2023 - 4
Independent Banker - November 2023 - 5
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