Pub. 10 2015-2016 Issue 6

www.nebankers.org 26 Extraordinary Service for Extraordinary Members. A S HUMANS ADVANCED OVER TIME, OUR PRIMAL SENSES have evolved and adapted to help our species endure and thrive in different environments. Through instinct and experience we have sharpened our abilities with regard to sight, sound, taste, touch, and smell. In your capacity as a bond buyer, you can apply a bit of imagination and use your own market sensory evolution to develop a competitive advantage. You can apply your market senses of sight and touch to “see” and “feel” opportunities as they develop. Somewhere along the line you have probably heard the expression “the market just feels heavy.” Various sectors of the market will from time to time become saturated with an overall negative sentiment. This often makes these different corners of the bond universe feel sloppy. Once the souring opinions permeate throughout the investor community, the increased selling of these specific structures sours the prices as well. If you can develop a feel for certain areas of the bond market, you should then be able to rely on your evolved abil- ity to see a displacement and take advantage. Your ability to operate as an evolved investor is critical because, when it comes to investing in bonds, opportunities don’t all wear the same uniform. One such dislocation that occurs with some regularity involves the spread relationship between treasuries, non- callable agencies (bullets), and callable agencies. For a large part of 2012 and the first four months of 2013, the overall yields had stabilized at a very low level. That all changed quickly beginning inMay 2013. In just four months, the five- year treasury yield rose from .65 percent to 1.85 percent and the 10-year yield soared from approximately 1.65 percent to 3 percent. Callable agency coupons that were issued before this period quickly fell out of favor with portfolio managers as they were unable to hold their value as yields increased quickly and significantly. A tendency that investors exhibit after these periods is the desire to unload their underwater coupons, especially in the belly and the long end of the curve. In short order, the sellers of these lower coupons saturate Sensing Opportunity in Securities A.W. Spellmeyer, First Bankers Banc Securities the market with similar structures. As brokers struggle to find new buyers, the spreads can widen meaningfully versus their treasury and bullet counterparts. This market dynamic creates opportunities for those who have a feel for the mar- ket and the ability to see where the value lies. Well-placed purchases of these discounted callable bonds can provide an opportunity to increase returns over similar maturity bonds purchased at par. One recent opportunity that really did wear a different uniformwas a TVA (Tennessee Valley Authority) bullet due in the first quarter of 2021. TVA is a wholly owned government corporation (TVA debt is not an obligation of or guaranteed by the U.S. government) that can offer state and local taxation benefits with regard to its principal and interest payments. In late November and many points during December, these securities were able to be purchased at the optically powerful 2.00 percent level. These non-callable securities were being offered at essentially the same yield as their callable counter- parts. For investors who were able to see the intrinsic value of a bullet purchased at prevailing callable yield levels, this provided a compelling chance to capture some relative value. If you are in charge of deploying capital for your institu- tion, you are tasked, among other things, with identifying these types of opportunities as they occur. Many successful portfoliomanagers will invest anywhere they are comfortable but they will always invest with a purpose. The bond market has a lot of give and take at its core and prices of securities can be dramatically affected by supply and demand. Segments of a market that are the most out of favor can produce prices and spreads that are the most out of line. The ability to obtain a feel for areas that might be mispriced can lead you to seeing new opportunities.  For more information, contact Jerel Saltzman at First Bankers Banc Securities (FBBS) in Lincoln, Neb., at (866) 630-1131. Saltzman joined FBBS in 2006 and has 25 years of experience working with community banks in the Midwest providing portfolio management and asset liability advice. If you wish to communicate with the author of this article, contact A.W. Spellmeyer at FBBS at (888) 726-2880 or awspellmeyer@ firstbankersbanc.com.