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The reason 30%, 40% or more of investors funds are invested in bonds is because the asset class has performed…for decades…just like stocks. Yet seemingly no one concedes the bond bull market is over and the effect of this will be felt in all markets.

Be Prepared

February 24th, 2021 by Kurt L. Smith
  • The past week has been a tragedy down here in Texas. One crisis morphed into another leaving dozens dead and tens of billions in destruction. Simply terrible and preventable.

    As a Texas native, ridiculously cold weather for a ridiculously long (for us) time is not a once in a century experience. Every decade or so it happens. But Texans are not all native Texans now (or ever). Texas has been growing by transplants forever and their expectations eventually collide with a horrible reality.

    A gardener prepares his garden in the winter. A homeowner prepares her pipes before they freeze. An investor prepares for the downturn as the market moves higher. There is time for celebration but there is also time for work, the preparation what comes next.

    Last month we focused on the ten-year Treasury note and long bond. Friday, February 19th, those sold at new low prices (high yields). The long Treasury bonds has now lost 35 points in value from March 9, 2020 at 140.17+ to 105.05+ Friday (all prices from Bloomberg). One of the recently sold ten-year Treasury notes, the .625% of August 15, 2030, has now lost more in price that it ever promised to pay investors in interest over its ten-year life, trading at 93.6875.

    These treasuries are, of course, the favorite investment for the Federal Reserve Bank. Their appetite for all treasury securities has grown on their balance sheet from about $2.5 trillion a year ago to $4.8 trillion now (per Bloomberg). All the while, their price continues to fall.

    But hey, who cares about bonds or isn’t this just the cost of diversifying when the stock market is getting new highs? Absolutely not! The reason 30%, 40% or more of investors funds are invested in bonds is because the asset class has performed…for decades…just like stocks. Yet seemingly no one concedes the bond bull market is over and the effect of this will be felt in all markets.

    Over the past months I have stressed how the end of the bond bull market is the time to prepare for what is next. Selling your bond funds was the first natural step. Realizing that you are now a trader in your other asset classes is the next step.

    There is no trading of some more illiquid assets, like hedge funds, real estate, or other assets where you cannot point-and-click to exit. These take more time and planning to exit and that is what I believe you should do. With the world appears to be sloshing about in excess liquidity, this is the time to take advantage and exit these investments.

    I believe we will see stock investors face similar decisions to those of bond investors. Do you sell some now, wait until down 10%, 20%, 30%? This is the preparation of a market at an all-time high. You have seen it before? What did you then? What should you have done? More importantly, how did you feel about it?

    The tragedy in Texas this past week is that it all could have been prevented. One should be able to prepare their garden and wrap their pipes without worrying about whether one will have power or water tonight.

    Our systems are more fragile than almost anyone believes. They are constantly exposed, especially here in the past twelve months. It is hard for anyone to ignore, yet do not make the mistake of ignoring the fragility in our financial markets. Now is the time to act.

    Frenship Independent School District, TX

    Unlimited Tax School Building & Refunding Bonds, Series 2021

    Aa3 Moody Underlying

    AA Fitch Underlying (Aaa/NR/AAA Permanent School Fund)

    Due 2/15   Dated 2/15/21 Maturity 2/15/50

    $144,275,000 Sold

    Years   Maturity     Coupon      Yield*

     0            2021           4.00%          0.11% (8/15/21 Mat)

     1            2022          4.00%           0.16%

     2            2023          2.00%           0.24%

     4            2025          2.00%           0.48%

     5            2026          5.00%           0.60%

     6            2027          5.00%           0.71%

     7            2028          5.00%           0.84%

     8            2029          5.00%           0.97%

     13          2034**      3.00%           1.50%

     14          2035**      3.00%           1.56%

     15          2036**      3.00%           1.60%

     16          2037**      3.00%           1.64%

     17          2038**      3.00%           1.68%

     20          2041**      3.00%           1.74%

     25          2046**      3.00%           1.98%

     29          2050**       3.00%           2.05%

    *Yield to Worst (Call or Maturity) ** Call 2/15/30

    Source: Bloomberg

    This is an example of a new issue priced the week of 2/22/21

    Prices, yields and availability subject to change

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