The Select Group

Be Prepared

February 24th, 2021 by Kurt L. Smith

The past week has been a tragedy down here in Texas. One crisis morphed into another leaving dozens dead and tens of billions in destruction. Simply terrible and preventable.

As a Texas native, ridiculously cold weather for a ridiculously long (for us) time is not a once in a century experience. Every decade or so it happens. But Texans are not all native Texans now (or ever). Texas has been growing by transplants forever and their expectations eventually collide with a horrible reality.

A gardener prepares his garden in the winter. A homeowner prepares her pipes before they freeze. An investor prepares for the downturn as the market moves higher. There is time for celebration but there is also time for work, the preparation what comes next.

Last month we focused on the ten-year Treasury note and long bond. Friday, February 19th, those sold at new low prices (high yields). The long Treasury bonds has now lost 35 points in value from March 9, 2020 at 140.17+ to 105.05+ Friday (all prices from Bloomberg). One of the recently sold ten-year Treasury notes, the .625% of August 15, 2030, has now lost more in price that it ever promised to pay investors in interest over its ten-year life, trading at 93.6875.

These treasuries are, of course, the favorite investment for the Federal Reserve Bank. Their appetite for all treasury securities has grown on their balance sheet from about $2.5 trillion a year ago to $4.8 trillion now (per Bloomberg). All the while, their price continues to fall.

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Never Sell Anything

December 16th, 2020 by Kurt L. Smith

Years ago, and I mean many years ago, it became apparent that bond portfolio managers rarely sold bonds in their portfolio. Sure, active managers might sell something to keep their active manager label active, but rarely did a bond manager sell bonds in the portfolio to meaningfully move the needle on their holdings. If a manager did not like the market, she could enter a derivatives trade to place her bet instead.

Another reason for the never sell mentality in bonds was the fact that more money usually came in the door. When bonds perform well, investors tend to stick with it or even add funds. Combine all this with the other fact that bonds do mature, and bond portfolio managers are usually in the position of deciding where to invest cash rather than the prospect of selling bonds to raise more cash.

This has been the case for decades, though there may have been some managers slow in the 1980’s and early 1990’s to warm up to the fact that we were in what would become a multi-decade bond bull market. While the rise in the bond market has not been straight up, I would argue, from a portfolio management standpoint, it might as well have been. Bond portfolio managers have largely been reluctant to sell even prior to the large swoon in the financial crisis of 2007. If anything, the recovery since has largely reinforced the idea of never sell anything.

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Be Prepared

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