Pub. 8 2019 Issue 1

15 S P R I N G | 2019 F E A T U R E option embedded in them, the cash flow graph with rate shock scenarios resembles an inverted bell curve, with increased cash flow from falling rates in the near term, and increased cash flow from rising rates in the distant future. Step with a Ladder This column will now enter the recommendation stage. As alluded to earlier, the curve is very flat out to about the seven- year stage. At some point, we will see a steepening of the curve, and usually a steepening occurs when the Fed is cutting rates. Bond wonks refer this condition as a “bull steepener.” A suggestion is to get a grip on how much of your port- folio would be at risk of being called away, if and when rates fall. Most full-service brokers can produce for you a simple cash flow table, which calculates how much cash your portfo - lio will throw off each month, in a wide range of rate scenari- os. This report should be complimentary and can be updated frequently, including weekly. Secondly, and this hasn’t been talked about very much this decade, the portfolio structure known as a “ladder” performs pretty well when the yield curve steepens. Portfolio manag- ers that have built out the alternative construct known as the “barbell” have been rewarded over the past five years. Ladders produce superior total returns with bonds that have some degree of “lockout” (a.k.a. call protection). Agency bonds are staples of this strategy. Don’t let an unexpected interest rate swing whip your investments’ cash flows around. Stay attuned to your call risk and consider building a solid ladder as a foundation of your bond portfolio. Jim Reber is president and CEO of ICBA Securities and can be reached at (800) 422-6442 or jreber@icbasecurities.com . Cash Flow Tables on Demand ICBA Securities’ exclusive broker Vining Sparks will create a com- plimentary shocked cash flow bar graph and a cash flow table for any community bank upon request. For more information, contact your Vining Sparks sales rep or visit viningsparks.com . This column will now enter the recommendation stage. As alluded to earlier, the curve is very flat out to about the seven-year stage. At some point, we will see a steepening of the curve, and usually a steepening occurs when the Fed is cutting rates.