Municipal Letter Newsletter Sign-up >>>


Owning assets that mature is the key. Owning assets of top quality, perhaps with collateral, is important. Staying away from portfolios or packages is also important.

Bond Portfolio Blunders

April 3rd, 2023 by Kurt L. Smith
  • It is hard to fathom a $42 billion run on a bank. In one day, no less (source: State of California). One thing for sure, the dollars are bigger now. No longer do you need to stand in line to get your money from your bank. Zap, you can move it. Bang, the doors of the bank are shut. Just another day (or weekend) in our financial life.

    Silicon Valley Bank (SVB-NYSE) did what any rational investor would do, realizing the bond market was in a bear. It sold. Not at the bottom in October, but in March, during the bond bear market correction. As I have said on these pages, a correction, particularly the end of a correction, is a good time to sell.

    SVB had a plan and it hired Goldman Sachs to help implement it (source: Rueters). Sell $24 billion in bonds, mostly U.S. Treasury securities, for $21.45 billion. Considering 2022 was the worst year for bond market performance in the history of history, the losses could have been much worse. Goldman also advised the bank on a $2.25 billion capital raise to replace the bond loss. A prudent plan, it sure appeared.

    No bank can survive a run on its deposits. Prudently run bank or otherwise, a bank run leads to a closed bank. So that is what the state of California did. The bank was closed. Now what?

    But SVB’s bond portfolio was not even the problem. The FDIC sold a portion of SVB’s loan portfolio which enables the FDIC to estimate the loss to the FDIC at $20 billion (source: FDIC), many multiples above the bond portfolio loss that supposedly sparked the bank run. This may be one of the first instances in this bear market where we discover the mark-to-market losses in public securities (stocks and bonds) are dwarfed by the unrealized losses in private market securities (loans).

    One needs to keep one’s money somewhere safe. This is not news. Bank panics have long been a hallmark of my career, particularly with the Texas bank debacle of the 1980s and the financial crisis of 2008. In a bear market, unforeseen things happen. In March we saw they also happen fast.

    You do not need to depend on a bank. You can and do have the opportunity to safeguard your assets in safe assets. Owning assets that mature is the key. Owning assets of top quality, perhaps with collateral, is important. Staying away from portfolios or packages is also important.

    It is not municipal bonds that have served you well through the first three years of the bond bear market. Municipal bonds also had one of their worst performance years ever last year. It is The Select ApproachTM that helped you navigate the storm, not just for the past year or two or three, but for many years. Review your results and see.

    I was wrong about the correction being over last month. Like the unpredictability of Groundhog’s Day, a bank failure or two has prolonged the correction a few weeks longer. A few names propelled the NASDAQ index to a new correction high while U.S. Treasuries rallied to new correction highs as well. As I’ve said all along, corrections are hard to trade. Ask anyone trying.

    But this is only a correction. As it ends, and it will end, the next leg of the bear will unfold. Perhaps banks will take the Federal Reserve’s offer and not sell bonds. It does not matter. Bond prices can plummet without widespread selling (see 2022 for a case example). But know the losses in bond portfolios can get worse and with tens of trillions of dollars at risk, at some point, we are talking real money.

    City of Denison, TX

    Combination Tax and Revenue Certificates, Series 2023

    AA- S&P Underlying  AA Fitch Underlying

    Due 2/15   Dated 4/19/23 Maturity 2/15/43

    $39,520,000 Sold

    Years   Maturity           Coupon      Yield*

    1         2024             5.00%           2.73%

    2         2025             5.00%           2.73%

    3         2026             5.00%           2.67%

    4         2027             4.00%           2.64%

    5         2028             4.00%           2.69%

    6         2029             5.00%           2.71%

    7         2030             5.00%           2.73%

    8         2031             5.00%           2.77%

    9        2032             5.00%           2.82%

    10         2033**         5.00%           2.84%

    11          2034**       5.00%           2.95%

    12          2035**        5.00%           3.08%

    13          2036**        5.00%           3.28%

    14          2037**        5.00%           3.45%

    15          2038**        5.00%           3.56%

    16          2039**       5.00%           3.65%

    17          2040**       4.00%           4.08%

    18          2041**       4.00%           4.20%

    19          2042**       4.25%           4.23%

    20          2043**       4.25%           4.28%

    *Yield to Worst (Call or Maturity) ** Call 2/15/32

    Source: Bloomberg

    This is an example of a new issue priced the week of 3/20/23

    Prices, yields and availability subject to change


    Tweetomatic error: Could not authenticate you.