Everyone Is A Bull

Month after month after month of seemingly never-ending higher prices has galvanized almost everyone as a bull. Last October’s low prices seem to be long forgotten. Let the good times roll! Of course, I am talking about the bond market.

The bond market is every bit as bullish now as the stock market. The bond market gave up its role as market arbiter so long ago most investors no longer know (or care) that bond investors were once considered voice of reason (or the alarmists in the room). Bond vigilantes in Wikipedia refer to the Clinton, and later, Obama administration. Certainly, they are no longer relevant, even if they existed…they long became bond market bulls, like everyone else.

The bond market is so big, and it has performed like a bull for so long, every manager’s bond portfolio essentially looks alike: a portfolio chock full of duration because that is where long-term performance has been made. After all, it is a bull market world out there and everyone seems to know it.

Portfolio managers cannot afford to sell bonds that have performed almost every single year and of course this year their performance has been nothing but up. So, ride the bull wave just like their stock investing brethren.

Stocks and bonds have performed in such lockstep for so long one has to wonder why anyone would own bonds when one could simply own stocks. When one stock, Apple, is worth 75% of all municipal bonds outstanding, why not just own Apple? There are $4 trillion in municipal bonds outstanding and at its current price of $193 Apple is worth over $3 trillion (prices and context provided by Bloomberg).

A valuation of $3 trillion for one company may be hard to fathom, but it is also emblematic of the bull market mania which exists in almost every market. In a bull market buying the dips has worked well and ever since the lows of last year it has worked wonders in stocks as well as bonds.

But while bull mania continues to be the guiding motive in bonds, bond prices remain weak. Short term yields are near their highs, meaning prices are near their lows, yet bond buyers are bullish. Sure, the yields are high, and price is low but that is because things are about to change, they say. Yields will begin to go back down soon…we are bullish…we know so!

Looking at the longer-term bond prices one might expect to find prices closer to their highs similar to the situation in stocks. These are the long-term bonds portfolio managers have been loath to part with, yet prices are not lifting. Tremendous value was wiped away last year as the bond market had one of its worst years ever. Prices did bounce off last October ‘s lows but, unlike stocks, there has been no follow through. Prices of the US Treasury 1.25% of May 15, 2050, have formed a shelf at about 54 since the October bounce from 49 to 60. It has been months since the price was near 60; falling through the shelf would not bode well for long-term bond price performance.

Bull manias feel good. Really good. But reality returns and quickly at that. Think 2000, 2007, 2020. Prices plunged after those dates leading to dips worth buying. Was last October a dip worth buying or merely a head fake? The bull mania seems to answer that question. But we are still below last year’s January high (Stocks) and precariously close to last year’s October lows (Bonds). Something seems amiss. Be careful out there as bull market mania extremes can be dramatic turning points.

Bonham Independent School District, TX

Unlimited Tax School Building Bonds, Series 2023

Aaa (A1 Under) Moody’s

Permanent School Fund Guaranteed

Due 2/15   Dated 7/15/23 Maturity 2/15/49

$63,945,000 Sold

Years   Maturity           Coupon      Yield*

1         2024             5.00%           3.20%

2         2025             5.00%           3.15%

3         2026             5.00%           3.00%

4         2027             5.00%           2.85%

5         2028             5.00%           2.80%

6         2029             5.00%           2.80%

7         2030             5.00%           2.80%

8         2031             5.00%           2.80%

9         2032             5.00%           2.80%

10         2033           5.00%           2.85%

11          2034**       5.00%           2.90%

12          2035**        5.00%           2.97%

13          2036**        5.00%           3.08%

14          2037**        5.00%           3.25%

15          2038**        5.00%           3.35%

16          2039**       5.00%           3.43%

17          2040**       5.00%           3.49%

18          2041**       5.00%           3.55%

19          2042**       5.00%           3.58%

20          2043**       4.00%           4.00%

23          2046**       4.00%           4.10%

26          2049**       4.00%           4.18%

30          2053**       4.00%           4.23%                

*Yield to Worst (Call or Maturity) ** Call 8/15/33

Source: Bloomberg

This is an example of a new issue priced the week of 7/18/23

Prices, yields and availability subject to change