Pub. 5 2016 Issue 2

March 2016 33 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 2016 Legal Update Seminars April 5 Afternoon Overland Park • Ritz Charles April 6 Afternoon Wichita • DoubleTree by Hilton April 7 Afternoon Marysville • Landoll Lanes April 12 Afternoon Colby • Sleep Inn April 13 Afternoon Garden City • Clarion Inn April 14 Afternoon Hays • Robbins Alumni Center April 19 Afternoon Great Bend • Perkins Restaurant April 20 Afternoon Salina • Ambassador Hotel April 21 Afternoon Topeka • Capitol Plaza Hotel April 26 Afternoon Wichita • Holiday Inn April 27 Afternoon Chanute • Quarry Stone Golf Club April 28 Afternoon Overland Park • Ritz Charles Refreshments & 35 qt. Yeti Cooler Drawing Provided by Educational Resources 785-232-3444 www.ksbankers.com The Kansas Bankers Association is pleased to announce that KBA’s Senior Vice President and Legal Department Director, Terri Thomas, will again be presenting a series of Legal Update Seminars this spring. One recent opportunity that really did wear a different uniform was 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 their 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% level. These non-callable securities were being offered at essentially the same yield as their callable counterparts. For investors that 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. The preceding examples are two of many possible examples, both general and specific, that have manifested themselves recently in the non-Mortgaged Back Securities (“MBS”) agency market. Investors that are able to gain a feel for the relationship between various Collateralized Mortgage Obligation (“CMO”) structures and comparable pass-thru securities can often see value as well. Many MBS investors experienced the negative effects of faster prepayments on securities owned at premiums. This has created a lasting aversion to higher priced MBS securities for many accounts. This situation led to an increase in the issuance of CMO tranches that had “stripped” coupons (coupons that were lower than the collateral coupons from which their payments were derived). As the securities possessing these lower coupons became battered with increasing yields and an oversupplied marketplace they experienced a similar fate as the discounted callable securities mentioned earlier. For some investors with a good feel for this corner of the market they were suddenly able to see these newly out of favor bonds with spreads that seemed outsized for inherent risks judged to be associated with their structures. If you are in charge of deploying capital for your institution you are tasked, amongst other things, with identifying these types of opportunities as they occur. Many successful portfolio managers will invest anywhere they are comfortable but they will always invest with a purpose. As market participants there are things we can see and there are things we can feel. The intersection of these two senses, seeing and feeling, can help signal an opportunity. The bond market has a lot of give and take at its core and prices of securities can be dramatically affected by demand elasticity. 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 opportunities while others who are doing the selling only feel the pain. If you wish to contact the author of this article you can via email (awspellmeyer@firstbankersbanc.com) or phone (888-726-2880).