It Only Takes One

After four months of sideways price (yield) action in bonds, one might tend to believe nothing has changed or nothing is happening. Thankfully the municipal bond market offers us tens of thousands of unique opportunities over a similar timespan.

Ten year treasury notes doubled in yield from 1.32% to 2.64% in the second half of 2016, but for 2017 the market has traded in a narrow range. This corrective phase may already be complete or we may have more time to diddle. The important takeaway is that I believe the market for longer-term bonds will resolve into much higher yields and much lower prices.

Market participants appear to continue to believe whatever they have been believing for the past several years. The trend following crowd continues to own (and purchase) long-term bonds primarily because that strategy has been a long-term winner. Under this narrative, there is no reason to sell or trade bonds in the portfolio on the basis of a change of interest rate trends as no trend change forecast exists.

Because of the difficulty (time, effort, availability and cost) in trading a portfolio, many managers tend not to make large changes in their municipal portfolios but instead utilize other investment vehicles to hedge or look for additional leverage in taking advantage of a perceived change in long-term interest rates. It would be conceivable that trading volumes in the municipal bond market would therefore tend to be low and stay low.

Sometimes I feel amazed any municipal bonds outside of new issues ever trade at all. While I have spent my entire career wondering whether particular municipal bonds would trade again, I find worthwhile bonds do trade,  and many do each and every day.

Houses are unique pieces of real estate.  “It only takes one” refers to the number of buyers needed to consummate a trade of a house.  In my world, municipal bonds are the unique items and what we wait for each day is for these unique items to appear in the marketplace.  It only takes one bond to provide us with a worthwhile opportunity.  One bond at a time.

While I believe every municipal bond is unique, very few possess the characteristics that make them worthwhile.    Filtering the multitude of municipal bonds which are possible trades is a daily process, separating wheat from chaff.   Systems are important as is experience. The Select Approach^TM makes use of both in a continuing effort to bring you worthwhile municipal bonds for your portfolio.