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Whether we begin the next phase of higher rates and lower prices immediately or whether it takes a few more months, is not important. What is important is you are prepared and you are prepared because you own the proper asset, chosen by The Select ApproachTM.

Depths of Summer

August 6th, 2018 by Kurt L. Smith
  • Heady days and bond markets rarely go together. Nor do the terms ‘bond market’ and ‘news’. Add summer and vacations into the mix and the bond market becomes French. Absent.

    I may exaggerate but not much. Thankfully we are not looking to keep up (or primarily down) with any bond index, we are not burdened by scale or the inability to find worthwhile bonds. Every day I get to practice and build my skills and every day things come together. Except in the summer, things come a bit more slowly.

    Last month I discussed how the markets are poised for a fall. One more month without the Bond Crash of 2018, but the first of August brought ten year US Treasury note yields back to 3% for the first time in several months.  Most of 2018 has so far been a correction of the dramatically higher yields (and double-digit price losses of longer bonds). Whether we begin the next phase of higher rates and lower prices immediately or whether it takes a few more months, is not important. What is important is you are prepared and you are prepared because you own the proper asset, chosen by The Select ApproachTM.

    Looking back over the almost six years of the Bond Bear Market and your results, well, they speak for themselves. Were rates going lower forever? Nope. Were one percent (or less) short-term tax free interest rates going to be the new norm? Nope. Were negative yields, so prevalent in Europe, headed our way? No again.

    The Select ApproachTM has worked well. While others felt the need to go with long-term bonds in their search for yield, we found worthwhile returns in shorter bonds.  While others felt the need to sacrifice quality in their search for yield, we found worthwhile bonds in worthwhile credit quality.  Opportunities continue because the municipal market is unique.

    Today the Federal Reserve chose, unsurprisingly, to keep interest rates unchanged. As a devout follower of the bond market, expect the Fed to raise interest rates after market interest rates move.

    Will the Fed’s moves affect our ability to continue to work our plan?  Again, I would turn to history and our experience together to answer that question. With my thesis being we are in year six of a Bear Bond Market, we have had ample opportunity to work in a rising interest rate environment. On the other hand, if short term interest rates were to unexpectedly fall, we have plenty (years) of experience negotiating a low interest rate environment.

    You know however my expectation is for change, and great change at that. I believe the great change will be centered around credit quality. Like the thirty-plus year Bond  Bull market that saw interest rates disappear to almost nothing, so did investors’ concern for credit quality. So lightly regarded, investors measly concerns for credit quality has outlasted the Bond Bull Market by six years so far and counting.

    I do not expect this situation to continue (or survive) the Bond Market Crash of 2018. Market surprises happen because they are markets. I expect change today when there has been seemingly little, because I work with markets. It is experience that reminds us that change happens; just ask Dell or General Electric. Hockey sticks occur, but they don’t continue forever. They all end at the top and sometimes a very high top.

    A renewed focus on credit quality will not change the way we do business but I do expect it to matter. When value can evaporate in twenty percent increments overnight, investors will (eventually) get the message. And when they do, we will be working our plan, just like we did last month and every month…even summer months.

     

    Lufkin Independent School District, Texas

    Moody’s Aaa (Aa2 Under)

    Permanent School Fund Guaranteed

    Due 8/15 Dated 8/1/18 Maturity: 8/15/2043

    Sale Amount: $44,350,000

    YEAR MATURITY COUPON YTM*
    1 2019 5.00% 1.52%
    2 2020 5.00% 1.71%
    3 2021 3.00% 1.86%
    4 2022 5.00% 2.01%
    5 2023 5.00% 2.12%
    6 2024 5.00% 2.26%
    7 2025 5.00% 2.35%
    8 2026 5.00% 2.49%
    9 2027 5.00% 2.56%
    10 2028 5.00% 2.64%
    11 2029** 3.00% 2.80%
    12 2030** 3.00% 2.95%
    13 2031** 4.00% 3.00%
    14 2032** 3.125% 3.27%
    15 2033** 5.00% 2.92%
    16 2034** 4.00% 3.31%
    17 2035** 4.00% 3.35%
    18 2036** 4.00% 3.39%
    19 2037** 4.00% 3.43%
    20 2038** 4.00% 3.45%
    21 2039** 3.375% 3.56%
    22 2040** 3.50% 3.58%
    23 2041** 3.50% 3.60%
    25 2043** 3.50% 3.63%

      *Yield to Worst (Call or Maturity) **Par Call: 8/15/2028

    Source: Bloomberg

    This is an example of a new issue priced the week of 7/31/18

    Prices, yields and availability subject to change

     

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