Community Bankers of Iowa Monthly Banker Update January 2014 | Page 8

Like a Rock
Written By: Jim Reber, President/CEO of ICBA Securities

Callable agencies underperformed in 2013
Community bankers, like any other consumer,
love a bargain. Some of you (you know who
I’m talking to) will wait to buy a bond until
you can get X yield, which sometimes is just
unrealistic. Some of you will wait until you
can sell a bond you currently own at Y price,
no matter how far from market that is. And
most of you will pay attention to a bond that’s
selling at 95 percent of what it was worth just
a few months ago.

Upside from here
So with all these foibles, why would an
informed portfolio manager consider buying
them? Part of the answer is that now that
they’ve been priced into significant discounts,
there is the ability for callables to actually
appreciate in value. For another, their yields
to maturity, which is the likely outcome, still
are noticeably higher than non-callable bonds
(“bullets”) of the same duration.

An example of the last is a callable agency
bond that was hatched in early 2013.
“Agency” means it’s a debt obligation of
Fannie Mae, Freddie Mac or the FHLBank
system. “Callable” means it can be paid of