Don't Let the Call Own You
Release Date: April 21, 2021
Participants: Natalie Regan, Scott Carrithers
Topic: Don't Let the Call Own You
Click here to listen now, or read the transcript below:
Welcome to the April edition of The Leaderboard Report. I’m Scott Carrithers, managing director for Country Club Bank’s Capital Markets Group.
In today’s Leaderboard Report, we will hear from Natalie Regan, an investment officer from the Capital Markets Group team, who will discuss strategies and other options she is recommending to her community bank clients.
Thank you, Scott.
As an Investment Officer with Country Club Bank’s Capital Markets Group, I work with financial institutions providing profitable strategies and solutions for fixed income portfolios.
The Treasury yield curve has made major moves year over year. Although yields inside of two years are still lower than they were a year ago, the belly and the long end of the curve have more than doubled.
As trends and the tone of the market change, different sectors of the bond market can become more active. One sector where underwriting has increased in the past several months is agency callables. This comes as no surprise, since their issuance typically picks up in a rising rate environment.
These agencies and GSEs—Fannie Mae, Freddie Mac, Federal Home Loan Bank—are in the business of issuing plain vanilla debt. More recently, though, they have been issuing more and more diverse structures to satisfy specific needs of investors. But, they are also holding on to their right to exercise their call as the issuer.
Callable bonds are generally offered at higher yields to compensate the investor for the risk of having their holding called away from them. The spread does exist at the time of purchase. Still, investors should study the structure and call features to ensure their portfolios are well equipped to receive the principal back at par—either at maturity, the initial call, or at any date in between.
Initial call dates on each bond vary greatly. They can range anywhere from one, three, or six months to one or two years. Though the call date is set in stone, what can happen after the call date is a very important detail.
Issuing agencies use several different types of calls. The most common are American, European, Bermudan and Canary.
American calls have a defined initial call date and are then callable any day afterwards until maturity. American calls are also referred to as continuous, or anytime calls.
European calls have only one call date. Once the predefined call date comes, it is either called or held to maturity. These are also called one-time calls.
Bermudan calls can be called after the initial call date on certain predefined dates at a specified frequency—monthly, quarterly or annually. These are often called by whatever their stated frequency is—like “quarterly call.”
Canary calls are part callable, part step up. They can be called on their initial call date or any of the predefined call dates. But, if they are not called, the bond will step to a new coupon and becomes noncallable to maturity. Canary structures may have multiple steps but will always have a noncallable bullet feature at the end.
Each call type can have different implications on the overall portfolio, especially if a portfolio is using a laddered structure.
As an example, let’s consider an investor who places a portion of their portfolio in agency callables with varying maturities—but all with a one-year call date. A dip in yields could push all of those holdings in the money to be called—and all of that principal will come back to the investor at the same time. Therefore, it’s important to understand when and where bonds should, or more importantly could, be placed in the expected cash flow.
We are happy to discuss these call features and other agency structures in more detail with you at any time and review how these structures can work for or against you depending on the goals you have set for your bond portfolio. Just give us a call.
Thank you for listening in! Have a great day.