As we proceed into the second quarter of 2021, I’ve happily been building out presentations to a number of community banking groups. I noticed that the past year generated products, strategies and terms that hadn’t been used much previously or, in some cases, didn’t exist.
- Participants in the fixed-income market, including underwriters, broker-dealers and analysts, are quite fond of creating acronyms and nicknames to define these new terms. In some cases, they’re clever, logical and easy to recall. In other cases, they’re curious.
- Several years ago, this column featured some of the more popular and relevant acronyms and nicknames in play at the time. Given the space limitations, we didn’t get to visit all of these terms, and since that time, we’ve got more material to discuss anyway. So, as a service to community bankers who wonder what some of the lingo being passed around actually means, let’s play another round of the word association game.
Could be: An exclamation by celebrity chef Emeril Lagasse as he “kicks things up a notch.”
Reality: An acronym for the Bloomberg Agency MBS prepayment model. Most community banks have significant investments in mortgage-backed securities (MBS). The offering sheets made available by selling brokers have a table that estimates the yields and average lives when given a range of prepayment “speeds,” which are derived from a large number of variables. These include horizon rates, borrowers’ credit scores, geography and servicer, among many others. BAM is one of the more widely used models for these projections.
Could be: Metal projectiles shot out of a firearm barrel.
Reality: Debt instruments that contain no call features. These are only partially embraced by investors because they have lower yields than those that can be called away. However, bullets also have a greater ability to appreciate in price given a drop in market rates. About 5% of a typical community bank’s investment portfolio consists of bullets.
Could be: A colloquial synonym for an automobile, a popular means of transportation for the past 120 years or more.
Reality: An acronym for capital at risk, which is one of the more important interest rate exposure measurements. This calculation quantifies the dollar and percentage change to capital in changing rate environments, typically plus 3% and 4%.
Could be: Cardiopulmonary resuscitation, an emergency procedure to restore one’s heartbeat.
Reality: An acronym for conditional prepayment rate, which is how models like BAM (see BAM) are quantified in yield tables. CPR assumes a certain number of prepayments occur in a given forecast yield environment and displays these amounts as an annual rate.
Could be: Resistance to the motion of one object or surface when moving over another.
Reality: Qualitative features of certain MBS pools that can limit the borrowers’ ability to refinance. Prepayment friction can occur when the average principal balances in a pool are lower than conventional loans (e.g., maximum $125,000) or when the properties are in states that impose onerous taxes in a refi (e.g., New York or Florida).
Could be: A verb meaning to increase a motor’s speed by accelerating while the clutch is disengaged.
Reality: As an adjective, it’s short for Revenue, a type of municipal bond. Munis are repaid via two main tax streams. For General Obligation (GO) bonds, ad valorem property taxes are usually the source. For Revs, income from some specified service or activity (e.g., utilities, parking, tolls) is designated for debt service.
Could be: A New Yorker’s pronunciation for a long, upholstered piece of furniture used for seating.
Reality: An acronym for Secured Overnight Financing Rate. 2021 may be the year that the preferred index for interest rate swaps in the U.S. will finally transition away from the London Interbank Offered Rate (LIBOR) and into SOFR, with an assist from banking regulators. There is usually a degree of correlation between SOFR and LIBOR.
Could be: A pressurized valve that dispenses malt beverages.
Reality: A Federal Home Loan Bank program to issue a series of bullets (see Bullets) in a specified window of time without the need to submit new registrations for each bullet. The result is that a given TAP issue is likely to have a larger total size and improved liquidity.
Could be: The final distribution of all of the proceeds of a bond issue to end investors.
Reality: The end of this column.