More of the Same

No, I did not delay writing this letter until we heard from the Federal Reserve on Wednesday afternoon. When was the last time the Fed surprised? Indeed, this Federal Reserve chair, Jerome Powell, is more of the same.

In the mold of the maestro, Alan Greenspan, Powell serves up optimism with the confidence that the Federal Reserve has “our tools and we will use them” to get the job done. Not only does he have the tools, but he also has experience using them. Whereas former Fed chair Bernanke questioned whether he had the authority to act and act boldly, Chair Powell suffers no such hesitation. He has already been there and done that.

Chair Powell has decisions to make. Inflation is the worst in 40 years, interest rates are rising without his involvement and the Federal Reserve balance sheet now stands at $9 trillion ($8.867TR, per Bloomberg). Thankfully everyone is working…everyone that hasn’t retired, quit, or been sidelined by COVID

This past month things are beginning to break down. Our beloved bond market, the one I continue to shoo you away from, continues to deteriorate. One should not own bond mutual funds which has been my stance for almost two years now. Benchmark yields such as the two-year US treasury note or the ten year note have risen substantially, yet Fed Chair Powell continues to wait.

So where are we as January draws to a close? For buyers of the two-year US treasury note such as the 0.125% of 5/31/22 looked very smart as their note traded at a premium for much of its life (all prices and yields per Bloomberg). But now, with two-year treasury yields moving from about 20 basis points to 120 this past week, the best thing about that note is it will mature soon. Therefore, we do not spend much time talking about two-year notes.

However, the ten-year US treasury note we have followed since 2020, the 1.50% 2/15/30, is now trading at new lows of 97.50. Original buyers of that note looked like heroes in March 2020 at prices peaked at over 110 (over 109 in August 2020) but forever south since then. Our bellwether thirty-year U.S. Treasury bond, the 2.375% 11/15/49, traded below par in March 2021, down from 140 in March 2020 but so far is trying to stay above water, trading above 110 at year-end to a 103.25 low on January 19^th.  Evidently there are bets a poor economy may be a boom to longer dated bonds.

None of this rises to the point of action for Chair Powell except he has added the word “soon” to his verbiage. “I think there’s quite a bit of room to raise interest rates without threatening the labor market, Chair Powell said. It seems that cow is already out of the barn, but hey, thank you for the transparency, Chair Powell.

But why are we talking bonds when stocks and crypto are where the action is. Indeed, stocks and crypto have provided nice diversification for the hard-core bond investor…until that is no longer the case. The stock indices, as well as Bitcoin, the leading crypto, have recently seen months of gains erased in a matter of days. There is nothing unusual about this and there is nothing unusual about the Federal Reserve’s lack of action. The Fed responds to emergencies; it does not prevent them.

That is the crux of the issue. The Federal Reserve did not prevent the dot.com bubble from bursting in 2000 or the Great Recession in 2007 or the 2020 Great Shut Down(?). The Fed may choose to respond, eventually. Which means January’s market activity is, I believe, merely a prelude to what may become another named event or emergency.

The lack of volatility leads to complacency and complacency leads to great volatility. There was no need for me to talk about stocks these past umpteen months but, after January, it is different. Who would ever think a chart of Netflix would mirror a chart of Bitcoin…to the downside? Thankfully, fully entrenched bond investors own bonds.

The stakes are higher today because valuations are higher. But the stakes are also higher because there is infinitely more wealth involved. When inflation was last a thing, forty years ago, stocks had been going nowhere for years (we call it the seventies) and interest rates were double digit, and no one could fathom a trillion dollars. Today we are at the other end of the forty-year bull market in stocks, have seen the end of the bond bull market and have a $3 trillion company in Apple. This time is different.

We continue to find worthwhile bonds in the municipal bond market. Look at your statement from Maplewood. That chart on the front page shows you graphically the volatility in your bond portfolio. I hope you like it. You do have alternatives with your investments, and I appreciate the ability to have served you in the past as well as our new future.

Dallas Independent School District, TX

Unlimited Tax General Obligation Bonds, Series 2022

Aa1 Moody AA+ S&P AA+ Fitch Underlying

Aaa/AAA/AAA on PSF Guarantee

Due 2/15   Dated 2/1/22 Maturity 2/15/52

$406,905,000 Sold

Years   Maturity            Coupon      Yield*

1             2023               5.00%            0.41%

2             2024               5.00%           0.61%

3           2025              5.00%           0.76%

4             2026             5.00%           0.88%

5            2027             5.00%           1.01%

6            2028             5.00%           1.14%

7            2029             5.00%           1.24%

8             2030              5.00%           1.34%

9             2031              5.00%           1.38%

10           2032**          4.00%           1.50%

11           2033**          4.00%           1.54%

12          2034**         4.00%           1.58%

13          2035**         3.00%           1.81%

14          2036**         3.00%           1.84%

15          2037**         3.00%           1.89%

16          2038**         3.00%           1.93%

17           2039**         2.375%           2.375%

18           2040**         2.375%          2.43%

19          2041**        2.45%           2.47%

20           2042**         2.50%             2.50%

22          2044**          2.625%           2.625%

25        2047**           2.70%             2.71%

30        2052**           2.75%             2.77%

*Yield to Worst (Call or Maturity) ** Call 2/15/31

Source: Bloomberg

This is an example of a new issue priced the week of 1/17/22

Prices, yields and availability subject to change