Pub. 5 2016 Issue 2

l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s 32 A SHUMANS 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 ability 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 in May 2013. In just 4 months the 5yr treasury yield rose from .65% to 1.85% and the 10yr yield soared from approximately 1.65% to 3%. 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 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 that have a feel for the market 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. SENSING OPPORTUNITY IN SECURITIES By A.W. Spellmeyer, President First Bankers’ Banc Securities, Inc.