Independent Banker - November 2023 - 35

Next: Find the right fintech for your bank 
favor hybrids over straight passthroughs:
lower prices, wider spreads,
better total returns. About the only
metric that would favor the MBS
over the hybrid is liquidity, which
is a conversation worth having with
your brokers.
Another favorite entrée is a wellstructured
collateralized mortgage
obligation (CMO). One of the benefits
of a CMO over the " collateral, " which
is the MBS used to build out the
various classes of an issue, is that an
investor can choose tranches with
specific coupons, prices, cash flows
and principal payment windows that
better fit the community bank's needs.
Finally, while supplies of these
MBS alternatives are limited, brokers
should be able to locate some
offerings of both given reasonable
parameters. This includes securities
bearing the GNMA label, which many
investors like for the full-faith-andcredit,
0% risk-weighting feature.
Just desserts
The final item on this month's
menu has been offered before (see
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.
Independent Banker March 2023),
but now with a few additional
ingredients. Rarely, if ever, have
such a wide range of pass-through
rates on mortgage securities been
available simultaneously. This gives
a portfolio manager a delectable set
of options. About the only selections
that are not available at the moment
are premium MBS; par (100.00) and
discount pools are what the market
is serving.
The good news is that discount
pools can be found at virtually any
Education on Tap
Bank balance sheet webinar this month
ICBA Securities' exclusively endorsed broker Stifel is presenting its
Quarterly Bank Strategy webinar on Nov. 16 at 1 p.m. Eastern. Several
strategists and economists will discuss current market conditions
and opportunities. Up to 1.5 hours of CPE are available. To register,
visit icbasecurities.com
Mortgage analytics monthly
Stifel Mortgage Strategy produces an MBS Prepayment report
monthly that is available to all ICBA members. This report contains
commentary and a comprehensive look at the overall MBS market
with tables, charts and graphs. To begin receiving copies, contact
your Stifel rep.
price. As of this writing, 15-year 4.0%
pools are priced with a 96 handle,
while 15-year 2.0%s are in the 86
range. (Disclosure: Be aware that
the lower the coupon, the tighter the
yield spreads.)
You can also take this one step
further with the CMO market. It's
possible to locate a given tranche
with a significantly discounted
price, even though the collateral is
more " current coupon. " This could
potentially create an opportunity
for some improved cash flow, if and
when rates begin to recede, as the
newer loans with 7%-plus borrowers'
rates will be the most responsive to
refinance opportunities. In epicurean
terms, it's " tastes great, less filling. "
There you have an enticing bill of
fare for November. Straight passthroughs
with wide yield spreads,
hybrid ARMs with great total return
characteristics and well-built CMOs
can create a veritable smörgåsbord
for your community bank's
bond portfolio.
Jim Reber, CPA, CFA (jreber@
icbasecurities.com), is president
and CEO of ICBA Securities, ICBA's
institutional, fixed-income brokerdealer
for community banks
independentbanker.org // 35
http://www.icbasecurities.com http://www.independentbanker.org
Independent Banker - November 2023

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