Bank Directors Seminar, Coeur d'Alene, ID, September 15-17, 2019

If you believe rates will remain flat...

• A. Keep Duration Long • B. Buy bonds with high negative convexity (and high yields) • Purchase securities where you are rewarded for taking option risk (new 30yr current MBS pools, Par Callable agencies with short call protection, continuous calls and long final maturities) because these securities should have the highest yields • C. Buy long maturity munis — taxable or tax exempt

When you believe rates will fall...

• A. Keep duration long (effective duration around 3.0 or longer) • B. Buy discounts • Ex. Discount Callable, Discount, Low Coupon MBS (prepayments increase yield) • C. Avoid calls and optionality (buy long bullets or long call protection periods) to prevent reinvestment risk

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