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No one wants to be responsible and yet we are all responsible.

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.

    Let me clarify. We are all in this together yet the collective responsibility for (fill in the blank) has been ignored and will continue to be ignored. It is easier to pollute in Texas, yet we breathe the same air. We should have power and clean water, but maybe not all the time or maybe you should invest in a backup generator because you have the money to do so.

    We are so far from normal it is laughable. Look at the yields on the San Antonio TX ISD bonds below. At yields of .09% to 2.29%, is there any point on the curve that will help us beat inflation?  That will cover us for the risk we may be taking with our money?

    Yet investors continue to pour money into municipal bonds because they are tax-free, and they have “performed well in the past.” Well, guess what, the past is just that, the past.

    Like our crumbly infrastructure, the bond market has had a good run. Almost forty years of declining interest rates will do that for you. Someone who has never owned bonds before can invest in numerous different bonds or bond products never knowing how interest rates have affected past performance. Why get bogged down in details when lowering your taxes is a priority?

    Investors with The Select ApproachTM know better. All bonds are not created equal, even in these heady times when it seems like all high-priced bonds should be considered “good”. The worthwhile bonds we find perform differently from other bonds and that is why we select them.

    Both stocks and bonds have done well against inflation over the past forty years but perhaps that is not because stocks and bonds perform well against inflation. It may be, because over the course of our memory, our country has grown economically and, for the past forty years interest rates have plunged to nearly zero buoying bond prices to their highs.

    The idea that stocks and/or bonds will continue to keep pace with inflation in the coming decades appears to me to be a dream. Interest rates are not cooperating and bond prices, particularly US Treasury bond prices (discussed over the past number of monthly letters), are moving in the wrong direction.

    So far investors continue to pour money into bond issues like San Antonio ISD. One day they may look at those yields and say why? Who knows, maybe this is happening every day now and down the road we will see it reflected in bond prices.

    San Antonio Independent School District, TX

    General Obligation, Series 2021

    Aa2 Moody’s Underlying  Aaa Permanent School Fund

    Due 8/15   Dated 6/1/21 Maturity 8/15/51

    $268,380,000 Sold

    Years   Maturity     Coupon      Yield*

    1             2022          5.00%           0.09%

    2            2023           5.00%           0.15%

    6            2027           5.00%           0.64%

    7            2028           5.00%           0.78%

    8            2029           5.00%           0.92%

    9              2030         5.00%           1.03%

    10           2031**       5.00%           1.10%

    11           2032**      4.00%           1.24%

    12           2033**      4.00%           1.27%

    13          2034**      4.00%           1.29%

    14          2035**      4.00%            1.32%

    15          2036**      4.00%            1.36%

    16          2037**      4.00%            1.40%

    17          2038**      4.00%            1.44%

    18           2039**      4.00%            1.48%

    19           2040**      4.00%           1.52%

    20          2041**      4.00%            1.56%

    26          2046**      2.25%            2.24%

    30           2051**       2.375%        2.29%

    *Yield to Worst (Call or Maturity) ** Call 8/15/30

    Source: Bloomberg

    This is an example of a new issue priced the week of 5/10/21

    Prices, yields and availability subject to change

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