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Investments - Page 2

How Much Will the Fed Be Able to Increase Rates?

By Mark Tranckino 

On Dec. 16, 2015, by unanimous vote, the Federal Open Market Committee lifted the fed funds rate by one quarter point to a range of 0.25 percent to 0.5 percent. It was exactly seven years to the day earlier that the FOMC moved rates to the “emergency” level of essentially 0 percent.

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Are Non-Bank Qualified Municipal Bonds a Bet Worth Taking

By Kevin Doyle

Q: Should commercial banks take the bet and purchase higher-yielding Non-Bank Qualified municipal bonds? Before attempting to answer, several related aspects should be addressed for perspective. (more…)

Portfolio Rate Shocks: Parallel vs. Non-Parallel

By John McQueen

Instantaneous, parallel rate shocks have been the standard scenarios used in measuring the interest rate risk inherent in investment portfolios for many years. But are they the best scenarios for evaluating interest rate risk? Instantaneous, parallel rate shocks generally do not represent the path that market interest rates follow during various economic cycles. Yield curves tend to steepen or flatten in slope over time, depending on the state of the economy and the Fed’s monetary policy. This begs the question: Do gradual, non-parallel rate shocks provide better estimates of interest rate risk than instantaneous, parallel rate shocks?

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The Song Remains the Same: Low and Flat

Weighing the odds and the implications of a difficult yield curve environment

As we have routinely mentioned, the economic landscape continues to set up for a seemingly probable continuation of the low rate environment we have navigated throughout 2015. The strong dollar continues to weigh on net exports as pointed out by the Federal Open Market Committee (FOMC) in October. This headwind reverberates through our economy as the rate of job growth has moderated as 2015 has moved along, while modest wage gains have not outweighed the impact lower energy costs and cheaper imports have had on inflation expectations.

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Coming Soon: The Fed and its Bond Portfolio Unwind?

By Jeff Goble

The Federal Reserve was chartered in 1913 for the purpose of providing a centralized banking system and to serve as the lender of last resort in times of financial crisis. The Panic of 1907 had made it abundantly clear that a financial safety net was needed for our nation.

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Evaluating the Coupon Rate in Pre-Purchase Analysis

By Christopher R. Morgan

The coupon rate and the effect it has on the liquidity, market value and any optionality of a fixed-income security is an integral, but often overlooked, part of pre-purchase analysis. There are several ways to mitigate the amount of loss when rates inevitably rise: increase cash holdings, purchase short-term and/or floating-rate bonds and buy high-coupon “cushion” bonds. The latter can be a bit of a shock for some, as a higher coupon is accompanied by a higher price, but in a rising rate environment a high-coupon bond will lose less and provide income above the prevailing market rates. Simply said, higher-coupon bonds hold their value in a rising-rate environment better than the near-par and discounted price alternatives. High-coupon bonds (also referred to as kickers, cushion bonds, premiums or rate shields) will provide greater cash flow that will allow investors to repurchase securities at lower prices (higher yields) and mitigate losses as rates eventually increase.

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Calculating Your ‘True’ Yield?

By Jeff Goble

For many bond investors, securities backed by mortgages like pass-through pools and collateralized mortgage obligations can provide important income, diversification and qualifying securities that can be pledged. In the UMB Peer Group, approximately 30 percent of all securities currently held are mortgage-backed issues, second only in size to municipal bonds at 34 percent.

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Monitoring Mortgage-Backed Securities

By Larry Russell

Many community banks hold mortgage-backed securities of one form or another in their investment portfolios for a variety of reasons. Although some bankers choose not to invest in MBS, they have been an important holding, on a long-term basis, in many high-performing bank portfolios. At this time, the bond market carries a higher level of price volatility due to the uncertainties of the timing of the first hike in rates by the Fed since June 2006. This is a unique time in history, given the level of interest rates, the span of time spent at these generational rates, and the historically high valuations of other asset markets that are tethered to the U. S. bond market and Fed policy.

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Can Events of 1937 Provide Guidance for the Fed in 2015?

By Jeff Goble

While everyone knows it is virtually impossible to consistently outguess the bond market going forward, the rear view mirror is always very clear. What can the Federal Reserve’s actions in the second half of the Great Depression tell us about what might be ahead during the central bank’s upcoming rate normalization strategy?

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What to Make of Negative Interest Rates in Europe

By Tom McKernan

Old timers in bank bond portfolio investing like to reject financial news fluff such as, “This time is different,” opting instead for the wisdom of Ecclesiastes: “There is nothing new under the sun.” Generally speaking, “This time” is not different. However, interest rates are negative in the countries of Germany, Switzerland, Ireland, Belgium and Denmark. We’ve even heard reports of negative home mortgage rates in Denmark. Although negative interest rates are not unprecedented, this time truly is different, at least in Europe.

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