Community bank bond portfolios are finally turning the corner
From The Baker Group, ICBA Securities endorsed portfolio manager
For more than a decade, community bank bond portfolios languished under the weight of the Fed’s zero interest rate policy, or ZIRP. Portfolios filled with higher yielding bonds that matured or got called away, saw their yield slowly erode as the average bank portfolio yield fell from more than 5% in 2007 to less than 2% in 2021. In fact, bank holdings of low-yielding bonds (I’ll define that as less than 2%) have exceeded their holdings of high- yielding bonds (greater than 4%) for the last 13 years. But the Fed’s aggressive tightening cycle of 2022-23 and the subsequent surge in bond yields have helped banks turn the page on the era of low yielding bonds.
For the first time since 2012, the percentage of bonds yielding 4% or more has surpassed the percentage yielding less than 2% (see chart). It's a crossover that most bankers didn't dare imagine just a few years ago. And it represents both a milestone worth celebrating and a call-to-action portfolio managers can't afford to ignore.