Municipal Letter Newsletter Sign-up >>>

 

As we move towards the six year anniversary of the end of the Great Bond Market Bull, how many investors know we are in a Bond Bear Market? How many have changed their portfolios as a consequence?

The End of Slow

July 6th, 2018 by Kurt L. Smith
  • Halfway through the year and still no Bond Crash of 2018. Despite the double-digit losses in the longer US Treasury market discussed last month, the sell-off is orderly. With a recent temporary pause (treasury bond prices have bounced the past six weeks), the set up remains quite ripe for the Bond Crash of 2018.

    Stocks are doing their part as well. Take a look at the Dow over the first six months of the year. A sharp rise into January’s record highs only to swoon into February’s dive. Given ample opportunity for investors to buy this year’s dip, the Dow has instead delivered how a bear market behaves. Gapping down, filling gaps, falling further and partial retracements of late…these are bearish descriptions of the Dow over the past weeks.

    We are left with a bond market bear that began in 2012 and the beginning of one for stocks. This, despite record profits, surging growth, tax cuts and off the chart optimism in just about every metric out there. The market doesn’t care; the market is a market.

    The importance of these paragraphs are not because they portend change, a change we can all ride out together. No. These paragraphs and my years of harping on this subject is because the changes will be generational, unfathomable changes.

    The trend is only your friend if you are on the right side of it. As we move towards the six year anniversary of the end of the Great Bond Market Bull, how many investors know we are in a Bond Bear Market? How many have changed their portfolios as a consequence?

    I never thought the end of the Great Stock Bull Market would resolve itself slowly. The Crash of 1987, Swoon of 2000 and the Great Recession of 2008 did not happen slowly. They happened when few, if any, thought they would.

    With both stocks and bonds set up to fall hard in the coming months our strategy will become even more important. Cash is the place to go and this is what executing The Select ApproachTM is all about.

    Harvest your other investments, stack the cash and put it to work in worthwhile municipal bonds. You won’t read about this in the Journal. You won’t hear this from your friends. You only know about it because it is the plan we have been executing for many years, especially the past ten.

    The reason we are hearing about problems in emerging markets stock markets is because these markets are ahead of the Dow in their fall. When US markets fall below their February lows, you will hear more talk that the bear market for stocks is for real. Interest rates will resume their rise as well, affecting all bond markets, including municipals.

    So if municipals are not immune from bear markets, why is this the place we choose to invest? The answer lies with what is a bond, rather than what is a municipal. Cash is what we have, what we should seek and move into. You can’t invest much in cash, it is cumbersome, subject to theft and fire and is usually associated with illegal activities. The cash I refer to is a short bond. How short should a bond be to be considered cash is an open question. Warren Buffett, years ago, judged it to be about five years. Shortness is a key factor but so is bond quality as well as the bonds terms and conditions. Why municipals? The answer lies with the ability to find worthwhile bonds even in an almost six year old Bond Bear Market.

    In a world of increasing size and scale, commoditization and correlation, municipals can offer the opposite. Taken as a whole, municipals are a generic asset class of bonds and will behave that way. Six years of bear have already had an effect and the next leg down will be much more devastating. But within municipals, options exist , thankfully in select municipal bonds.

    Municipal bonds as an asset class will suffer devastating losses just like other stock and bond asset classes. The difference is bonds mature, that’s the most important criteria for us. The opportunity however comes with the fact that within the municipal asset class there are tens of thousands of different credits, most with numerous differing terms and conditions that might represent worthwhile opportunities.

    Increasingly, worthwhile opportunities will probably increasingly mean “cash-like.” The Select ApproachTM practices a store of wealth model. Gold, real estate and oil will not serve as that store of wealth if their prices are falling. What is the “value” of those so-called hard assets? Who knows? On the other hand, bonds mature – that is our store of wealth.

    Funds don’t mature. ETFs don’t mature. Commodities and real estate don’t mature. Stocks don’t mature and especially, hedge funds and private equity does not mature. Those assets are subject to the market and market will not be a good one much longer.

    Bonds mature. Worthwhile bonds of The Select ApproachTM mature. This is what makes them the store of wealth for the coming market in the coming months and years.

     

     

    Texas City Independent School District, Texas

    Moody’s Aaa (Aa3 Under)  Standard & Poor AAA (AA Under)

    Permanent School Fund Guaranteed

    Due 8/15 Dated 7/1/18 Maturity: 8/15/2048

    Sale Amount: $70,000,000

    YEAR MATURITY COUPON YTM*
    1 2019 5.00% 1.53%
    2 2020 5.00% 1.70%
    3 2021 5.00% 1.88%
    4 2022 5.00% 2.00%
    5 2023 5.00% 2.14%
    6 2024 5.00% 2.28%
    7 2025 5.00% 2.42%
    8 2026 5.00% 2.53%
    9 2027 5.00% 2.63%
    10 2028** 5.00% 2.70%
    11 2029** 5.00% 2.75%
    12 2030** 5.00% 2.80%
    13 2031** 5.00% 2.83%
    14 2032** 5.00% 2.87%
    15 2033** 5.00% 2.92%
    16 2034** 5.00% 2.96%
    17 2035** 4.00% 3.30%
    18 2036** 4.00% 3.40%
    19 2037** 4.00% 3.43%
    20 2038** 4.00% 3.45%
    21 2039** 3.50% 3.62%
    22 2040** 3.50% 3.65%
    24 2042** 3.625% 3.70%
    30 2048** 4.00% 3.63%

      *Yield to Worst (Call or Maturity) **Par Call: 8/15/2028

    Source: Bloomberg

    This is an example of a new issue priced the week of 6/26/18

    Prices, yields and availability subject to change

     

  • NEWS FEED

    The $247 trillion global debt bomb washingtonpost.com/opinions/the-2…