The Right Bond

We began 2024 with municipal bonds having rallied, not just in price, but also relative to U.S. Treasury yields. Ten-year generic AAA municipal yields were 3.62% on October 23rd and 2.35% on December 23rd (all prices and yields per Bloomberg). Compared to treasury yields, the 2.35% on municipals was 62% of the 3.78% on treasuries.

Municipal bonds are spread product. Investors like us buy them because the bonds offer a spread (better yield) to the so-called risk free U.S. Treasury bonds of a similar maturity. At 62%, municipal bonds offer some of the smallest spreads in decades yet investors continue to buy. Bloomberg’s Joe Mysak noted this last week, saying “if munis revert to their long-term valuations, or around 85% of treasuries, they should yield more than 3.50% right now…there’s still a long way to go.” Yields have bumped up slightly. Look at this month’s new issue highlight: the Wiley Independent School District in Abilene, TX bonds below. But as Mysak says, they still have a ways to go.

Yields on municipals continue to be much higher than those we saw in 2020, 2021 or 2022, though on a relative basis they are quite expensive. Tens of billions of dollars of new issue long-term municipal bonds were priced in January. They do not need our help getting them sold. Municipalities never need our help, whether interest rates are low and going lower or high and going higher.

We have found worthwhile bonds in all kinds of markets. We found worthwhile bonds when interest rates were low and we found them when interest rates were higher. This is not because worthwhile bonds are necessarily less secure than the AAA scale or simply higher than the yields on the Wiley Independent School District bonds below. It is because municipal bonds are not generic like the US treasury securities, nor all similar to the near-generic Wylie school bonds. Municipals can be anti-generic. The right bond may be anti-generic.

This is why your portfolio performs the way it does. Look at your statement, particularly the cover page graphing your historical portfolio values. Whether interest rates are rising or falling we can find worthwhile bonds, though we cannot create them. We must wait for them to be sold…to us.

If you are a seller of bonds, it might make sense to sell when prices are historically relatively high, like the current market. Perhaps the late year rally in bonds was just the catalyst needed for someone to sell some bonds. They might not know the current credit situation of their bond, but they have decided they want to sell. Municipal bonds are priced in all kinds of ways, and this is what makes selection and The Select Approach^TM so unique.

The level of interest rates may not be the determining factor as to whether we are able to buy selective, worthwhile bonds. Interest rates have been higher than this and they have been lower. Interest rates will change. One party will win in November and the other will lose, but the betting on who will win continues for many months to come. Whether these factors are relevant I do not know or care. I only care that the owner of the municipal bonds I believe to be worthwhile are willing to say yes and sell us their bonds. Whether today, next week or next month, none is as important than initiating a trade that has us as the buyer of worthwhile bonds. This is the beauty of selection and The Select Approach^TM. Waiting is built into the approach. When the right worthwhile bond finally hits, it can be worthwhile indeed.

Wylie Independent School District, Abilene, TX

Unlimited Tax School Building Bonds, Series 2024

A1 Moody’s Under (Aaa on Permanent School Fund)

Due 2/15   Dated 1/17/24 Maturity 3/1/30

$182,340,000 Sold

Years   Maturity       Coupon        Yield*

1         2025             5.00%           3.19%

2         2026             5.00%           2.92%

3         2027             5.00%           2.83%

4         2028             5.00%           2.73%

5         2029             5.00%           2.71%

6         2030             5.00%           2.72%

7         2031             5.00%           2.72%

8         2032             5.00%          2.77%

9         2033             5.00%          2.78%

10       2034**          5.00%          2.78%

11       2035**          5.00%          2.85%

12       2036**          5.00%          2.95%

13       2037**          5.00%          3.05%

14       2038**          5.00%          3.20%

15       2039**          5.00%          3.28%

16       2040**          5.00%          3.39%

17       2041**          5.00%          3.47%

18       2042**          5.00%          3.55%

19      2043**           5.00%        3.61%

20      2044**           5.00%        3.65%

25      2049**           5.00%        3.94%

25      2049**           4.00%        4.24%

30      2054**           4.25%        4.40%

*Yield to Worst (Call or Maturity) **Callable 2/15/33

Source: Bloomberg

This is an example of a new issue priced the week of 1/22/24

Prices, yields and availability subject to change