Bonds Continue Their Roll (Role)

Another year, another dollar. Certainly explains the bond market.  As no-to-low yields continue to dominate the bond market, a dollar is about what many new bonds will pay you. And with little volatility, like stocks, total returns were positive. In other words, bonds fulfilled their role.

Only the US Treasury Total Return was negative this year, with Corporate Bonds and Municipal Bonds positive per Bloomberg’s indices. The US Treasury performance, while a loser, didn’t lose much year-over-year. With the melt-up of 2019 culminating in March 2020, US Treasury bond (past) performance looks stout. Again, bonds did their job.

But at current no-to-low yields, past performance is priced in. Many investors will look at the year and probably make few, if any, changes.  Why change what is working? There is no need to dump bonds as they have seemed to do their job, fulfilling their role.

It seems the only canary in the coal mine, bond-wise, may be US Treasuries, particularly long-term treasuries and we have talked about that extensively for almost two years now. One would think their trend to lower prices and negative performance would move the needle a bit.  Certainly after twenty-plus months. Certainly after the reinvention of the word inflation. But no; performance rules and complacency is where we live.

You know it is the power of your past municipal bond purchases that makes your portfolio performance work. But as we continue in the no-to-low yield environment, we continue to find worthwhile bonds. We are not getting much help supply-wise from sellers of municipal bonds but at least some bonds are sold so we can get them to you. That continues to be the story.  Thank goodness there are sellers out there!

Most investors own municipals through mutual funds and the no-to-low yields propelled mutual fund asset value higher and their total returns positive. This has been the case four out of five years for so many five-year periods that investors seemingly know no difference. Yes, bonds have fulfilled their role.

That game is over. Once you have pushed yields to next-to-nothing, you maximize bond prices. That’s the way the bond math works with a large percentage of the bond market. That is why it is called fixed income. In other words, there is no reason to continue to own a bond fund. While the asset value is based on today’s no-to-low yield, the dividend yield they pay you is not. Do not be fooled.

Investors will be able to tell their grandchildren that they owned bonds throughout one of the greatest periods to own bonds in history. They will be able to say bond prices are at their highest when yields are at their lowest and they benefitted. And then their grandchildren will ask, so why didn’t you sell?  This is what awaits us.

In the meantime, we do not buy those high-priced bonds.  We buy worthwhile bonds. It is something you can tell your grandchildren. And as more worthwhile bonds come into our marketplace, hopefully you can tell your friends as well.  Until then, tell them to get out of their managed bond funds. If they continue to like other areas of the market, fine. If they gripe about no other alternative, you can smile.

Happy New Year and may it be your best!

Fort Bend County TX Municipal Utility District #58

Unlimited Tax General Obligation Bonds, Series 2022

BBB+ S&P Underlying   AA S&P AGM

Due 4/1   Dated 1/1/22 Maturity 4/1/49

$17,230,000 Sold

Years   Maturity            Coupon      Yield*

3             2024               4.00%           0.60%

4           2025              4.00%           0.80%

5             2026             4.00%           1.00%

6            2027             4.00%           1.20%

7            2028**          2.00%           1.40%

8            2029**          2.00%           1.55%

9             2030**           2.00%           1.75%

10           2031**           2.00%           1.90%

11           2032**          2.00%           2.00%

12           2033**          2.00%           2.10%

13          2034**         2.00%           2.15%

14          2035**         2.125%           2.25%

15          2036**         2.25%           2.35%

16          2037**         2.25%           2.40%

17          2038**         2.375%           2.45%

18           2039**         2.375%           2.50%

19           2040**         2.50%          2.55%

20          2041**        2.50%           2.60%

21           2042**         2.50%             2.65%

25          2046**          2.625%           2.75%

28        2049**           2.625%           2.80%

*Yield to Worst (Call or Maturity) ** Call 4/1/27

Source: Bloomberg

This is an example of a new issue priced the week of 12/14/21

Prices, yields and availability subject to change