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Talking about 2.25% on thirty-year bonds…egads! Ridiculous is what it is and, yes, owning a 2.25% thirty-year bond of anything is just that…ridiculous.

Thankfully, You Own Municipals

September 9th, 2016 by Kurt L. Smith
  • While interest rates may appear they will be low, perhaps forever, we are always encouraged when we look back over the past months and years and discover we’ve actually fared well. Municipals are indeed unique and that is why we can continue to scratch and claw, but most importantly make headway by investing in them.

    Bonds, particularly municipal bonds have participated in a multi-month rally that was over-extended months ago. As a consequence, we believed stocks would also rally, continuing the tandem performance that has been a hallmark of the financial markets these past thirty-plus years.

    Indeed the major stock averages have set many new all-time high marks this summer. Stocks may have a few more months to rally, but the bond rally may be over.  As conviction and certainty for low rates (forever) continued, the bond market appears to have made a top in price that may stand for many, many years.

    Summertime means Jackson Hole, Wyoming, the perfect spot to be if it wasn’t inundated by a plethora of economists. Federal Reserve Chair Janet Yellen let us know that she too watches the stock market and with all the all-time highs, perhaps the economy is strong enough for a rise in short-term interest rates.

    Unfortunately for the savers of the world, there will probably be no help from Chair Janet so you can earn more on your cash. Stocks and bonds may be as good as they can get here, but Chair Janet has to worry about the greater picture whatever that is. Meanwhile we will keep scratching and clawing with our municipals.

    But as I said earlier, the bond market rally may have already ended. Around the Fourth of July ten year treasury yields ducked below February’s 1.55% to a new low of 1.32%. The yield on the ten year has moderated back above February’s levels of late but that is not true for the thirty year long bonds. The thirty year was 2.40% in February, 2.08% at July’s low and has only moderated around 2.25%. A move up toward 2.40-2.50% for the thirty year would be the first indication of further bond market weakness.

    Wow. Reread that preceding paragraph again. Talking about 2.25% on thirty-year bonds…egads! Ridiculous is what it is and, yes, owning a 2.25% thirty-year bond of anything is just that…ridiculous.

    Lower yields longer, negative yields to long-term maturities…this unfortunately is the reality of the world in which we live though we can certainly decide not to invest according to that mantra. Like the Dutch tulip mania, this may be one of those events people will be talking about long after we are gone.

    Thankfully we have our own reality, a multi-faceted, unique reality, in the world of municipal bonds. While we would rather not have to scratch and claw our way to results in the municipal bond market it sure beats the reality other bond investors have to deal with.

    We believe the best value for investors today is in cash alternatives with worthwhile yields and this is where we will continue to scratch and claw. The thirty-plus year bond market rally is probably over and the same is true for stocks. Commodities be it Oil, Gold or Real Estate, have also had nice rebounds but we see their various rallies ending soon as well.

    Little upside, with tremendous downside. This is not the recipe for successful long-term investing. It also has aptly described our stock and bond investing environment for all of 2015 and 2016. Those investing in commodities such as Oil, Gold and Silver can already tell you what tremendous downside means. We don’t need to experience it to realize we need to avoid it.

    Stay the course and do not become complacent. We will continue to do our part to find worthwhile municipal bonds.

    Aransas Pass Independent School District, Texas

    S&P AAA (A+ Under)

    Permanent School Fund Guaranteed

    Due 2/15 Dated 8/15/16 Maturity: 2/15/2041

    Sale Amount: $16,120,000

    YEAR MATURITY COUPON YTM*
    1 2017 4.00% 0.55%
    2 2018 4.00% 0.67%
    3 2019 4.00% 0.77%
    4 2020 4.00% 0.87%
    5 2021 4.00% 1.02%
    6 2022 5.00% 1.20%
    7 2023 5.00% 1.33%
    8 2024 5.00% 1.44%
    9 2025 5.00% 1.54%
    10 2026** 5.00% 1.65%
    11 2027** 4.00% 1.92%
    12 2028** 4.00% 2.04%
    13 2029** 4.00% 2.17%
    14 2030** 3.00% 2.44%
    15 2031** 3.00% 2.54%
    16 2032** 4.00% 2.36%
    17 2033** 4.00% 2.41%
    18 2034** 4.00% 2.46%
    19 2035** 4.00% 2.51%
    20 2036** 4.00% 2.55%
    21 2037** 4.00% 2.57%
    25 2041** 4.00% 2.62%

      *Yield to Worst (Call or Maturity) **Par Call: 2/15/2025

    Source: Bloomberg

    This is an example of a new issue priced the week of 8/29/16

    Prices, yields and availability subject to change

     

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