Posts Tagged ‘municipal bond market’

Not The Same As The Old Year

January 11th, 2018 by Kurt L. Smith

Happy 2018 to you and yours! I hope 2017 was a good year for you and may 2018 be wonderful.

One always tries to keep the wind at your back and this appears to be the consensus with investors. Optimism is extremely high and the business press (and stock market performance) reflects this sentiment.

This is the definition of trend. To be the trend it must show general tendency AND it needs to continue long enough to get noticed. The trend is your friend because you are an investor, not a trader. The trend can provide you sound grounding to make decisions as well as a framework for what may come.

These past several months we have discussed the next move in the continuing trend for bonds as well as a change in the trend for stocks. Bonds hit their high in price (low in yield) on September 8^th. Since then, rates have slowly risen, while I believed they would move up faster. The ten year US Treasury was 2.01% in September, a 2.47% high in November and a new 2.50% high in December. Two year treasuries were 1.25% in September, 1.78% higher in November and a new 1.92% high in December and 1.97% this past week.

The reason I continue to write about bond yields is because it is important to know the trend. I marked the end of the bond bull market back in 2012. Buyers of long-term bonds back in 2012 invested in low yields, their current bond value is less to boot as rates have risen and bond prices have fallen. (more…)

Moving Ahead

August 3rd, 2017 by Kurt L. Smith

Narratives make great stories, coaxing investors to invest but rarely the impetus to sell. Narratives, the stories about why the market is behaving this way or that, add fuels to the fire of salesmanship and lines up well for the growing herd, the multitude of trend followers.

The great narrative of the past few years has been yields are (and will forever be) low, so you should add riskier assets to your portfolio. This narrative has been in place so long ( for years) it appears it will never change.

Our approach shows otherwise. In the incredibly unique world of municipal bond investing, opportunities have existed in high quality credits that are not available in any other asset class. In a world focused on scale, size, generic products and spread, the municipal bond market offers this as well as alternatives to this. (more…)

The Plan Unfolds

July 13th, 2017 by Kurt L. Smith

It has been twelve months since the end of the hockey-sticked shape mania of long-term bond prices. Markets don’t trend in straight lines, so over the past twelve months I have used this letter to help you navigate where we are on the journey towards a collapse in long-term bond prices.

The July 2017 letter called the top in long-term bond pricing while subsequent letters followed the initial move to December lows and last month’s call that the correction was over. After a correction price high on June 12^th, long-term bonds have declined in price for the past twelve trading days (as of the writing of this letter).

Of course it may be better to be lucky than good, but I will accept any good fortune that comes our way. This letter provides me the opportunity to put forth my opinion, however much in the minority it may be, and I intend to take the opportunity because I believe it is quite important when a collapse in the long-term bond market is involved. (more…)

A Buy and Hold World

May 5th, 2017 by Kurt L. Smith

The municipal bond market is not so much of a market as it is a distribution scheme. Each week new issues of municipal bonds are sold, or distributed, to buyers looking for bonds like these offered. The bonds may disappear immediately or usually they are all distributed to buyers over several weeks.

The end result is the bonds are distributed. We can’t control whether or not any bonds are later offered or enter the marketplace. Last month I wrote that it only takes one: one bond coming back into the marketplace that may prove to be worthwhile for us.

This means the bulk of all municipal bonds are bought and held. With long-term bond yields trending down for thirty-plus years (and prices trending higher), a buy and hold strategy has been a winning strategy.

Yet somehow, someway, bonds come into the marketplace each and every day in an attempt to be redistributed. Thankfully not every bond holder buy and holds, so at least we get an opportunity to see if the bonds they are selling are worth buying. (more…)

It Only Takes One

April 10th, 2017 by Kurt L. Smith

After four months of sideways price (yield) action in bonds, one might tend to believe nothing has changed or nothing is happening. Thankfully the municipal bond market offers us tens of thousands of unique opportunities over a similar timespan.

Ten year treasury notes doubled in yield from 1.32% to 2.64% in the second half of 2016, but for 2017 the market has traded in a narrow range. This corrective phase may already be complete or we may have more time to diddle. The important takeaway is that I believe the market for longer-term bonds will resolve into much higher yields and much lower prices. (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…)

The Wait Is Over

December 7th, 2016 by Kurt L. Smith

I love it when a plan comes together. The August letter, First Bonds, Now Stocks, could not have been more spot on. The latest rally in Bonds began to reverse in July and it appears the first move towards a Bond Bear Market is now in place. And indeed the excitement the markets reserved for Bonds earlier this year did indeed move to Stocks with a recent exclamation point capping a three thousand point move up in the Dow that began in February.

For those of you reading the press clippings of these latest moves, please remember the narratives are worthless. Trends do not extend forever and long-time readers of this letter know I have been preparing for a change in the long-term trends of Stocks and Bonds for some time.

My excitement that my long wait may finally be over is based on the excitement both the Stock and Bond markets registered in 2016. Soaring prices, plunging and even negative yields, characterized the Bond market all spring long. Prices topped (and yields bottomed) in July with the bellwether thirty year US Treasury bond at 2.08%; by the first of December it was over 3.08%, an almost 50% jump in yield and 19% plunge in price. (more…)

My Daily Travels

November 4th, 2016 by Kurt L. Smith

Working in the municipal markets on a daily basis is like having the opportunity to travel the country each and every day. I visit California and Texas most often as they are big states with numerous debt issuers. But by the end of each day I have generally made a wide swing across many states and then tomorrow I will get up and do it all again.

Change doesn’t occur rapidly across the country but change does occur. Growing areas, primarily the biggest cities along the east and west coasts and in Texas, continue to grow. Everywhere else, and that’s a lot of everywhere else, seems to be doing a lot of nothing.

If municipalities were stocks, odds are you would only buy the top five or so. Think of them as the Apple, Amazon, Facebook or Google of municipalities. That’s how few areas of the country are growing. Not that growth solves all problems, but lack of growth, particularly if you were counting on it, can add unforeseen risk to the situation. (more…)

Over The Top

May 16th, 2016 by Kurt L. Smith

For the past several months we have discussed the manic moves of municipal bonds. As one of the best performing asset classes last year, it looked like we would be poised to experience follow-through this year with additional new money flowing into municipal bonds.

Indeed this has been the case. Money flows into tax free municipal bond funds continues week after week. Not only are new deals like the one’s presented at the bottom of each month’s newsletter selling well in the marketplace, we are also seeing intense competition for bonds in the secondary market. In a word, the market in my opinion is “hot”. But after several months of “hot”, the market seems to me to be “over the top”. (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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