Pub. 7 2018 Issue 2

15 s u mm e r | 2018 more than they would have a year ago, so an investor today has a big head start over 2017. End of Cycle Projections We created a hypothetical barbell portfolio by modeling equal amounts of 7(a)s and 20-year DCPCs. (The latter gener- ally are issued with 10- or 20-year maturities.) We made note of their market values and yields as of April 30, 2018, and in a 75-basis point (0.75%) it will create a higher environment over the next year. This rate-hike assumption was driven by both the fed funds futures market and by the Fed’s most recent projections. Here are the more important weights and measures: These results are probably conservative in that we are assuming a parallel shift upward in the yield curve. What’s more likely to happen is further flattening, by virtue of short rates reacting more in step with continued Fed tightening, and longer rates moving very little in comparison. A flattening would help preserve the market value of the DCPC, resulting in the price declining less than is displayed. Stretch Before You Lift As always, a word of advice from your trainer. These securities will probably produce very little cash flow in the early stages, especially if the pools are new. In fact, the fixed rate securities have prepayment penalties for the first 10 years. As they season, it’s more likely the floaters will have faster prepayments, so you’ll need to monitor your positions to keep the fixed/floating balance in place. So, if your bond portfolio is suffering from a lack of recent energy or isn’t built to run with the tailwinds from the Fed’s monetary policy, take a trip to your favorite broker’s financial fitness center. A session in barbell lifting can help flex your community bank’s economic muscle. Barbell Demo ICBA Securities’ exclusive broker, Vining Sparks, can develop a specific portfolio strategy using selected investments for any community bank. This modeling will display the current and projected returns and market prices for all investments in the strategy over a range of interest rate horizons. Visit viningsparks.com or contact your Vining Sparks sales rep for more details. Jim Reber is president and CEO of ICBA Securities and can be reached at (800) 422-6442 or jreber@icbasecurities.com. Current Mid-2019 Yeild 2.72% 3.05% Effective Duration 3.18 Years 3.34 Years Market Value 105.27 102.78 F E A T U R E