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Posts Tagged ‘asset class’

Thankfully, We Own Municipals

May 4th, 2018 by Kurt L. Smith

Three percent ten year US Treasury notes have generated recent buzz with the highest interest rates in over four years. More interesting may be the yield on two year treasury notes at over 2.50%, the highest yield in over nine years.

Lower for longer? This mantra for investing in both bonds and stocks has blown up. Interest rates are not lower and haven’t been lower for many years. My job is not to convince believers of the mantra that they have it wrong. Besides, despite rising interest rates, performance figures haven’t changed appreciably one way or the other. We continue to move forward with our approach.

Our municipal bond market is a relatively puny player in the world of financial assets. With $3.8 trillion outstanding in municipal bonds, municipals make up a small portion of the $40 trillion US bond market (SIFMA). Black Rock and Vanguard each manage more financial assets than the entire municipal bond market.

In the scheme of things, municipals do not matter. In the great buildup of the $40 trillion US bond market, municipals have become but a rounding error or an opportunity for diversification, whether warranted or not. (more…)

Municipal Bonds Are Different

February 3rd, 2017 by Kurt L. Smith

While technically all municipal bonds are government bonds, municipal bonds represent a subset of government bonds. Unlike the behemoth debt associated with almost all countries on the planet, including ours, municipal bonds are, well, usually smaller and sometimes just small.

Size matters, except when it comes to debt, bigger usually is not better. This is a qualitative difference where municipal bonds have the ability to shine. Unlike the debt upon debt upon debt of most government debt today, municipalities have the ability to truly be unique in their amount of leverage.

All five year bonds are five year bonds. And almost every five year government bond will be repaid because the government has promised to repay it. These government bonds carry the “full faith and credit” of their issuer to be repaid and are known as general obligation bonds.

When it comes to general obligations, bigger can indeed be better. Larger governments usually have more resources and usually are viewed as being less risky, or even safe or without (credit) risk as United States treasury bonds were viewed. (more…)

Our Plan Continues To Come Together

June 14th, 2016 by Kurt L. Smith

There has been no letup in the municipal bond market this year. Yields are low, prices high and firm. Yet we continue to find worthwhile bonds which I believe is a testament to our approach.

Thankfully, the municipal bond market provides a tremendous amount of variety. We have fifty states plus Puerto Rico, Virgin Islands and Guam. We have general obligations, revenue bonds of an almost endless variety, along with debt secured  by countless types of assets. All this variety and that’s before we throw on the essentials for fixed income: a coupon rate and maturity.

This variety, the anti-generic, is a crucial component of our approach. It is unique in the investment world and this is tremendously important as the world of investing has largely become one big, high-priced, low yielding world in which returns are piddling, that is when values aren’t plunging.

Asset classes, across the spectrum, are struggling, some plunge and pop, but overall it is downright tough to have a plan to diversify a portfolio and feel comfortable that you are making progress with your investments. Traditional thinking has failed to work, or just plain failed, while unconventional thinking seems to be …conventional. Where are the ideas that work? (more…)

What? Municipals on Top?!

January 15th, 2016 by Kurt L. Smith

Happy New Year!  Municipal bonds were one of the best performing asset classes for 2015*.  That doesn’t happen often (ever?)!  Municipal bonds didn’t post stellar returns but compared to the sub-par performance of almost every other asset class, municipal bonds came out on top.

Obviously we don’t invest in municipal bonds because we think they will be the top performing asset class each year.  We like the income, particularly tax-free income.  Municipal bonds may not have the sex appeal of other, perhaps higher yielding investments but they also do not have some of the risks.  In this era of low (to no) interest rates we have seen others chasing yields in all kinds of asset classes from master limited partnerships (MLPs) to high yield junk bonds and even in higher dividend stocks.

2015 saw some investments for yield really take it on the chin.  According to The Alerian MLP Index, Master Limited Partnerships (MLPs) as an asset class lost about forty percent of their value last year.**  Forty percent is enough to whack off many years of projected income and price fluctuation is but one of the risks associated with MLPs.  Sure the yield (income) investors were hoping to grab is still there…unless the MLP cuts the dividend rate, another risk associated with MLPs.  No doubt MLPs performed well for many years prior to 2015, but then, bam, the trend moves in another direction leaving MLP investors to try and salvage their investment. (more…)

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