It Was The Best Of Times

The holidays are upon us with the words of Charles Dickens usually coming from a stage near you, though these words are not from his A Christmas Carol. The opening line from A Tale Of Two Cities could also describe bond buyers here in the opening weeks of November.

The month began with ten-year U.S. Treasury note yields near 5% at 4.93%, just below a sixteen year high of 5.02% on October 23^rd (all yields and prices per Bloomberg). For owners of long duration bonds, it has certainly been the worst of times of late. For those ready to take the plunge and buy at these high yields and low prices, it may be the best of times.

A mere three weeks later and yields have plunged, or at least dropped a bunch, to below 4.40% on November 17^th. Hurry, before you miss out! But as a point of reference, 4.40% is also a sixteen year high for the treasury’s ten-year note, save the last three months.

Top ticking in any market is much more luck than skill and is not a certainty this downdraft in yields (rise in prices) has any legs to it. Such swift turns, as we also experienced last October, as rates swooned from 4.33% on October 21, 2022, to 3.40% December 7, 2022, make bond trading difficult, especially in a bond bear market. Before you know it, your newly purchased bonds might swing from gain to loss.

Thankfully we do not trade bonds and particularly U.S. Treasury bonds or corporate bonds where the levels of interest rates matter greatly. We work in the $4 trillion backwater of the bond market known as municipal bonds. Comparing this month’s Red Oak, TX bonds to last month’s better quality Conroe Independent School District, TX bond yields, one can easily see how the downdraft in treasury yields affect the yields of new issue municipals. But while municipal bonds can and do possess the qualities of other bonds, there are also a fair number of bonds that behave uniquely, without peer.

Longtime clients of The Select Approach^TM are aware of this. In these clients’ portfolios are some unique municipal bonds selected to perform. Some of our best performing bonds were purchased at a time which proved to be the worst time to purchase other bonds (like other municipals or treasuries or corporates). Yet they performed. Because of this, we scour the municipal marketplace each day searching for municipal bonds we believe to be worthwhile. Whether the ten-year treasury is trading at 1%, 2%, 3%, 4%, 5% or back lower, it is often the selection of the municipal bond that might matter most. A move from 5% to 4.40% matters in our selection, but certainly nowhere near the difference it makes for other bond markets and other bond market managers.

The excitement in today’s market is palpable. This may be the high for bond yields (at over 5%) and there is fear of missing out. Especially if you owned long-term bonds and have seen them drop 10%, 20%, 30% or more in price. How does one catch back up? In Vegas, one doubles down. The same is true in stocks and bonds.

Thankfully we do not need to participate in such risky behavior. The question of how bond investors, such as banks, insurance companies, and pension funds, make up for poor decision making about long-term bonds, is far from being answered. In the era of bailouts, we are certainly aware of one way. In the meantime, their risk-taking behavior need not affect our approach. Their situation is much different from ours and, for that, we should all be grateful this holiday season.

Red Oak, TX

Combination Tax and Revenue Certificates, Series 2023

AA S&P Under

Due 2/15   Dated 11/15/23 Maturity 2/15/43

$29,540,000 Sold

Years   Maturity       Coupon        Yield*

1         2024             5.00%           3.54%

2         2025             5.00%           3.47%

3         2026             5.00%           3.40%

4         2027             5.00%           3.34%

5         2028             5.00%           3.27%

6         2029             5.00%           3.30%

7         2030             5.00%           3.36%

8         2031             5.00%           3.39%

9         2032             5.00%           3.43%

10        2033            5.00%           3.45%

11         2034**         5.00%           3.48%

12          2035**       5.00%           3.58%

13          2036**        5.00%           3.75%

14          2037**        5.00%           3.97%

15          2038**        5.00%           4.08%

16          2039**       5.00%           4.12%

17          2040**       5.00%           4.20%

18          2041**       5.00%           4.27%

19          2042**       4.375%         4.65%

20          2043**       4.50%           4.70%

*Yield to Worst (Call or Maturity) ** Call 2/15/33

Source: Bloomberg

This is an example of a new issue priced the week of 11/13/23

Prices, yields and availability subject to change