Pub. 7 2016 Issue 3

FALL 2016 15 West Virginia Banker buying and selling opportunities, as shown below in Graph 2. By purchasing a bond at wide (cheap) spread levels, the investor is giving themselves the best opportunity to realize future price appreciation on a bond. As well, capturing the gains from selling a bond at historically tight levels is one way to significantly boost the overall performance of a portfolio. Repeating trades of this nature not only boost current earnings, but also generate additional investable funds to increase future income. This translates into increased ROA. For example, if a bank purchased bullet agencies a few years ago when spreads were wider they have a great opportunity to sell them today as spreads are currently tight. The sell will generate gains that along with the principal can be reinvested in sectors (CMBS, MBS, CMO, Corps) where spreads are wider. This sets the portfolio up to continue to perform going forward. Graph 2 0.00% 0.05% 0.10% 0.15% 0.20% 0.25% 0.30% 0.35% 0.40% 0.45% 0.50% 4/2/12 7/2/12 10/2/12 1/2/13 4/2/13 7/2/13 10/2/13 1/2/14 4/2/14 7/2/14 10/2/14 1/2/15 4/2/15 7/2/15 10/2/15 1/2/16 Agency Bullet (7 yr) Buy Wides Sell tights 0.00% 0.10% 0.20% 0.30% 0.40% 0.50% 0.60% 0.70% CMBS (FNMA DUS 5 yr) Buy Back in Here BuyWide, Sell Tight – TheWay to Higher Performance By tracking the historical spread to Treasury of a particular bond or sector, investors can easily see buying a d selling opp rtun - ties, as shown below in Graph 2. By purchasing a bond at wide (cheap) spread levels, the investor is giving themselves the best opportunity to realize future price appreciation on a bond. As well, capturing the gains from selling a bond at historically tight levels is one way to significantly boost the overall performance of a portfolio. Repeating trades of this nature not only boost current earnings, but also generate additional investable funds to increase future income. This translates i to increased ROA. For example, if a bank purchased bullet agencies a few years ago when spreads were wider they have a great opportunity to sell them today as spreads are currently tight. The sell will generate gains that along with the principal can be reinvested in sectors (CMBS, MBS, CMO, Corps) where spreads are ider. This sets the portfolio up to continue to perform going forward. Graph 2 The example above is just one of many ways that you can take an active approach to portfolio management. By taking a hands-on approach to managing the portfolio and seeking out spread op- portunities, trades like the one above can incrementally improve the overall performance of the portfolio. Using the reward to risk metric can help you track this progress on an ongoing basis. n Bryan Edmundson joined Duncan-Williams, Inc. in 2012 as a strategist with a primary focus on helping institutional clients better manage their investment portfolios. Bryan specializes in portfolio analysis, interest rate riskmanagement, bond swap analysis and the regulatory impact of municipal securities. Prior to joining Duncan-Williams, Bryan worked in the commercial banking industry for 6 years as a commercial credit officer and loan portfolio manager. His primary roles included commercial loan underwriting and portfolio riskmanagement, including financial statement analysis, cash flow analysis, and loan work- outs. Bryan graduated from Saint Louis University with a B.S. in Finance and Economics. Disclaimer: This material has been prepared by Duncan-Williams, Inc., member FINRA/SIPC (Duncan-Williams"), from information sources believed to be reliable. Duncan-Wil- liams expressly disclaims any and all liability which may be based on such information, errors therein or omissions there from, or in any other written or oral communication related thereto. This material is for your information only and should not be construed as investment advice or as any recommendation of a transaction. Neither Duncan-Williams nor any of its representatives is soliciting any action based upon this material. Specifically, this material is not, and is not to be construed as, an offer to buy or sell any security or other financial instrument referred to herein.