What Is An Investor To Do?

For forty years you have known the answer to this question. You buy and you buy more. Hindsight is wonderful and it also can give you great confidence. Stay the course, invest with us…turn on the television and follow the financial ads. So easy.

Except the world changed eighteen months ago. Not the pandemic; the bond market top-ticked almost forty years of a bull market. As a reader of this letter, you know the bellwether US treasury bond had a final run-up of forty points and then lost all of that. The bond bull market is over.

You may question, or continue to question, the relevance of such a situation. Obviously stock investors do not care, judging by the corresponding market move in stocks. But what is eighteen months in the scheme of things?  We are talking about your retirement or managing money (yours or others)?  These are long-term concerns. Besides, what if the run-up in stocks is merely the stock version of what we saw in bonds in 2020? What happens when stocks top-tick?  The status of the bond market is relevant, regardless of how or when it chooses to assert itself.

I do not need higher interest rates to find worthwhile bonds. I can do it in a low-to-no-interest rate environment as I have for the past ten-plus years. My interest in following the bond market, particularly the movement of US Treasury bellwether’s is because it matters.

Bonds matter because it is the fuel that has driven our world these past decades. As the bull markets matured, the idea of debt having a permanent role on your balance sheet or the balance sheets of the stocks you own, or real estate you own has also settled in. What should also settle in is the fact that someone or some entity holds this debt…until they decide not to. A bear market in bonds will change who is holding bonds and the change will probably not be pretty.

Look at the Hays County CISD issue below.  For the short-term maturities, the next to nothing yields on bonds means sky high prices. This pricing is used across the municipal bond mutual fund complex.  This is not new but has occurred for many months resulting in high priced mutual funds and staying there.  Whether high grade like these Hays County CISD bonds or “high yield” oxymoron municipal bond funds, the result is the same: high prices going nowhere, yet with an extreme amount of risk when investors lose their willingness to hold bonds.

Longer-term yields of less than 2% for twenty years seems ridiculous unless the lower-for-longer interest rate sentiment continues…forever, for example.  Inflation?  What is one’s after inflation return on any of the Hays bonds? Complacency (and no movement) appears to be the trend of the moment.

Obviously, investors are not focused on the downside risk in bonds. Or a forty-plus point selloff in the bellwether US Treasury bond might have led to a greater panic (not a yawn) and perhaps become a straight-line sell-off of fifty or sixty points. But that is not how markets work. How they do work however is they correct and this was the point of last month’s letter. Perhaps if bond yields move higher (and prices lower) from here, investors in other asset classes may notice.

Or perhaps not. Perhaps stocks continue higher until they do not. It may be a stock correction that finally gets stock investors attention. How or why something happens is not what is important. That narrative will change. What is important is that markets move, and they move in ways that, I believe, are hugely important. A bond bear market is one of those things.

We will continue to provide our investors worthwhile bonds regardless the level of interest rates. Our track record speaks to that. Our years of working in low-to-no-interest rate environment also speaks to that. But I continue to believe the unfolding bond bear market will result in changes in the financial markets that so many investors cannot even fathom.

Hays County Consolidated Independent School District, TX

Unlimited Tax School Building Bonds, Series 2021

Aaa Moody’s (Aa2 Underlying)   AAA Fitch (AA Underlying)

Permanent School Fund Guarantee Program

Due 2/15   Dated 8/15/21 Maturity 2/15/46

$115,210,000 Sold

Years   Maturity            Coupon      Yield*

1             2022              5.00%           0.05%

2            2023              5.00%           0.11%

3             2024               5.00%           0.15%

4          2025            5.00%           0.24%

5          2026            5.00%           0.42%

6            2027            5.00%           0.53%

7            2028            5.00%           0.72%

8            2029           5.00%           0.82%

9          2030**                 4.00%           0.96%

10        2031**                 4.00%           1.05%

11        2032**                 4.00%           1.12%

12        2033**                 4.00%           1.18%

13          2034**      4.00%           1.23%

14          2035**      4.00%           1.28%

15          2036**      3.00%           1.55%

16          2037**      3.00%           1.58%

17          2038**      3.00%           1.62%

18        2039**      3.00%           1.66%

19        2040**      3.00%          1.71%

20          2041**     3.00%           1.74%

25        2046**      2.25%           2.38%

*Yield to Worst (Call or Maturity) ** Call 2/15/29

Source: Bloomberg

This is an example of a new issue priced the week of 8/16/21

Prices, yields and availability subject to change