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Municipal Market Newsletter Archive

Low Rates Are Not Enough

September 27th, 2021 by Kurt L. Smith

For almost forty years interest rates have moved lower and for many of us we will forever regard today’s rates as low. This is nothing new. We have lived in a low interest rate environment now for many years.

Not content with relying solely on the economic drivers of low interest rates, the Federal Reserve has, at various times these past many years, decided it also needed to buy bonds. Evidently low rates are not enough.

Buying bonds might spur you or your brethren to also buy bonds. After all, bond prices can move upward just like other asset prices and in 2020 the prices for US Treasury notes and bonds soared.

Despite continued Federal Reserve bond buying, US Treasury notes and bonds climaxed in 2020. Investors know that down forty percent in price represents quite a climax. What happened Fed? Why aren’t investors continuing to buy US Treasury notes and bonds and following your lead?

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Posted in Municipal Market Letter

What Is An Investor To Do?

August 24th, 2021 by Kurt L. Smith

For forty years you have known the answer to this question. You buy and you buy more. Hindsight is wonderful and it also can give you great confidence. Stay the course, invest with us…turn on the television and follow the financial ads. So easy.

Except the world changed eighteen months ago. Not the pandemic; the bond market top-ticked almost forty years of a bull market. As a reader of this letter, you know the bellwether US treasury bond had a final run-up of forty points and then lost all of that. The bond bull market is over.

You may question, or continue to question, the relevance of such a situation. Obviously stock investors do not care, judging by the corresponding market move in stocks. But what is eighteen months in the scheme of things?  We are talking about your retirement or managing money (yours or others)?  These are long-term concerns. Besides, what if the run-up in stocks is merely the stock version of what we saw in bonds in 2020? What happens when stocks top-tick?  The status of the bond market is relevant, regardless of how or when it chooses to assert itself.

I do not need higher interest rates to find worthwhile bonds. I can do it in a low-to-no-interest rate environment as I have for the past ten-plus years. My interest in following the bond market, particularly the movement of US Treasury bellwether’s is because it matters.

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Posted in Municipal Market Letter

Correction Over!

July 28th, 2021 by Kurt L. Smith

Now that I have your attention, I hope I do not lose it by saying I am talking about long-term treasury prices. The March 2021 letter, Should We Be Traders? noted how the thirty-year bellwether treasury bond had lost all of its forty-point gain from the March 9, 2020, bond market top. The bond market moved from bull to bear, and I expect this bear to be a long one.

The bellwether bond we watch is the 2.375% of 11/15/49, trading at 141 on March 9, 2020 (all prices per Bloomberg, rounded for simplicity). The low since then was March 18, 2021, when it traded at 98. Over the past four months prices have bounced upward, trading at 113 last week on July 20th. This upward bounce in price is the correction that is now over.

When prices fall about 43 points over twelve months the expectation is for a bounce to occur, here about 15 points, over a shorter period. This price action also can be seen in yields, in the opposite direction, with yields rising from 1.00% in 2020 to 2.44% in March 2021 and back down to 1.82% last week.

Similar price/yield action has occurred in the ten-year treasury yield. The 1.50% of 2/15/30 traded at .31% on March 9, 2020, and 1.67% on March 31, 2021 and 1.04% last week on July 20th. Low to high then a bounce; this is the correction!

What does this mean? The idea of lower for longer (i.e., low interest rates) was shattered with a forty-plus point move and reversal. Interest rates have moved back down but this is not indicative of where interest rates “should be”, but rather a prelude to the next move which is to new interest rate highs (and price lows).

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Posted in Municipal Market Letter

Why Municipal Bonds?

June 23rd, 2021 by Kurt L. Smith

The obvious answer to the question “Why municipals?” is they are tax-free. That is a good reason, especially if the benefit is greater than the alternatives. From the days of double-digit yields of the early 1980’s the added benefit of the tax-free feature has almost always been worthwhile to investors in the highest tax brackets.

Of course, an almost forty year bull market for bonds helps as well, but that is over. Bond performance no longer has the wind to its back; bond performance now faces many headwinds. Selection is key no matter the market, but in today’s new bond market, selection is paramount.

The final stages of the bond bull market have wreaked havoc with investment managers and their investor clients. Where is the yield and what has performed well in these final throes of the bull? You know it is junk, or high yield. For municipals this means prisons, nursing homes, dormitories and other housing or land-based, new projects. For corporates, well you can find lower rated credits across industries.

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Return To Normal?

May 25th, 2021 by Kurt L. Smith

Vaccines are wonderful and it is great to get together with friends and family again. The feeling of hope and sharing good times are wonderful.

Last week we vacationed with the family in the mountains of North Carolina. Beautiful mountains, near the Appalachian Trail and, oh yeah, without any gasoline. Someone at the Colonial Pipeline thought it would be a good idea for a sixty-year-old pipeline to be on the internet. A group of Russian hackers looking to make an easy $5 million dollars agreed.

Before we left North Carolina we were re-routed off Interstate 40 in Memphis because the bridge across the Mississippi River was discovered to have quite a crack. I guess we were just lucky to make it across the bridge just a few days earlier on our way to the gasoline desert of North Carolina.

My February letter led off with the tragedy Texans faced losing electricity and later water service. While the cause was not Russian hackers, it might well have been. At least the Russian hackers apologized for their actions regarding the pipeline. Texans on the other hand, got to see their state legislature in action (yes, inaction).

Our infrastructure sucks. You do not have to be in the infrastructure business (like municipal bonds) to know this. We get to experience it…regularly. This is nothing new.  No one wants to be responsible and yet we are all responsible. We like to think we are immune here in Texas because so much of what we have is new: new highways, new airports, or at least terminals all over the state.  Yes, growth is better than the non-growth I see across the country but, as we experienced in February, we are not immune to infrastructure problems.  We are not even lucky.  Texas is a great place to be if you do not want to be responsible. Companies are moving here in droves as a result.

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An Ever Changing World

April 22nd, 2021 by Kurt L. Smith

High prices may be a time to celebrate, but they may also be a time for decision making. Nothing illustrates this better than the market for the U.S. Treasury bond bell whether trading at the highwater mark of highwater marks last year and losing all its gains since.

Last month we discussed the bellwether bond, the 2.375% of 2049 losing it’s 140 price premium, selling at a discount one year later in March 2021. For owners of this bond, it may be a case of easy come, easy go or we may hear “I bought it for the yield (seriously?)” as they continue to own the asset.

All owners of stocks should take notice. Gains do disappear, though stock investors also may take comfort in making the statement “I bought it for the yield” and continue to buy and hold. Everybody wanted to (and seemingly did) own General Electric, the darling of the 1980’s and 1990’s bull market, but then life happened, and it was not pretty.

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Should We Be Traders?

March 24th, 2021 by Kurt L. Smith

One year ago, I wrote my March 6th letter highlighting the risks of bond market investing when treasury securities all yielded less than 1%. It was a watershed moment and one I believed would be a reference point for years to come.

We have been following the bellwether treasury note and bonds as they continue to lose value as interest rates move higher. The ten-year note, 1.50% of 2/15/30, traded this past week below par at 98-22, down from 111-19 on March 9, 2020 or 11.5% lower (all prices from Bloomberg). The thirty-year bond, the 2.375% of 11/15/49 traded at a discount of 97-11+ versus 140-17 on March 9, for a 30.7% loss.

From a trading perspective, original buyers of these treasuries have watched their portfolio values surge and then come back to earth. A forty-point gain in the long bond is now wiped out. This is the nature of buying into a late-stage bull market. How high is high? Will you know it when you see it? Will you act or freeze?

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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.

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Bonds (Don’t) Move

January 20th, 2021 by Kurt L. Smith

Everyone can agree bond yields are low. Another way of saying that is, everyone can agree bond prices are high. But unlike the unhinged high prices of stocks, bonds are tethered to a maturity. The assumption of course being that the bond will be paid at time of maturity.

This risk of being paid (or not) is usually compared against what many consider to be the risk-free rate of US Treasury securities. Thus, Treasuries represent a non-credit risk option as they are assumed to be paid; the government will simply print more money to redeem them. All other (US) bonds do not have this feature of printing additional money; therefore, they are considered spread products.

As you know I recommended selling your bond products (mutual funds primarily), marking March 6th as the high-water mark for bonds. To say that March was a volatile month borders on understatement, but we witnessed US Treasury notes and bonds trade at their all-time highs in March.

The ten-year, Treasury note receives the most attention in the marketplace. For most of 2020 the note yielded less than 1%, again, a low yield in anyone’s book (and a high price). But recently the yield has moved over 1% leading to, well, the focus of this letter.

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Never Sell Anything

December 16th, 2020 by Kurt L. Smith

Years ago, and I mean many years ago, it became apparent that bond portfolio managers rarely sold bonds in their portfolio. Sure, active managers might sell something to keep their active manager label active, but rarely did a bond manager sell bonds in the portfolio to meaningfully move the needle on their holdings. If a manager did not like the market, she could enter a derivatives trade to place her bet instead.

Another reason for the never sell mentality in bonds was the fact that more money usually came in the door. When bonds perform well, investors tend to stick with it or even add funds. Combine all this with the other fact that bonds do mature, and bond portfolio managers are usually in the position of deciding where to invest cash rather than the prospect of selling bonds to raise more cash.

This has been the case for decades, though there may have been some managers slow in the 1980’s and early 1990’s to warm up to the fact that we were in what would become a multi-decade bond bull market. While the rise in the bond market has not been straight up, I would argue, from a portfolio management standpoint, it might as well have been. Bond portfolio managers have largely been reluctant to sell even prior to the large swoon in the financial crisis of 2007. If anything, the recovery since has largely reinforced the idea of never sell anything.

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