Low Rates Are Not Enough

For almost forty years interest rates have moved lower and for many of us we will forever regard today’s rates as low. This is nothing new. We have lived in a low interest rate environment now for many years.

Not content with relying solely on the economic drivers of low interest rates, the Federal Reserve has, at various times these past many years, decided it also needed to buy bonds. Evidently low rates are not enough.

Buying bonds might spur you or your brethren to also buy bonds. After all, bond prices can move upward just like other asset prices and in 2020 the prices for US Treasury notes and bonds soared.

Despite continued Federal Reserve bond buying, US Treasury notes and bonds climaxed in 2020. Investors know that down forty percent in price represents quite a climax. What happened Fed? Why aren’t investors continuing to buy US Treasury notes and bonds and following your lead?

Now that bond buying doesn’t seem to be working, certainly not for US Treasury note and bond buyers, the Federal Reserve is contemplating tapering this activity. Indeed, when your actions are no longer paying off, it is time to change your actions.

There are no doubt interest rates will remain low. Most investors remember 5% rates as low, so we should remain low for a while. But low rates are not enough.

Investors in other asset classes have forever said bond interest rates are low. Borrowing money to buy a house, a business, a stock, whatever, is the economic dynamics of a growing economy. It is low rates that keeps that economy humming along. The last thing the Federal Reserve wants to do is to screw this up.

Unfortunately, someone (or something) must own all these bonds. The Federal Reserve may not care to own losing assets because all (good) bonds mature, but investors probably care. Someone, or something, owned all those bellwether US Treasury bonds that lost forty points last year. Most probably did not sell because they bought bonds to own bonds. We should all be so lucky to have other investors own the wrong asset class. I don’t expect our luck to continue for years to come.

It is the direction of interest rates that matter because investors do not like losing money. We should continue to hope bond investors hang in there while they continue to lose money because it keeps the financial markets “looking normal.” The Federal Reserve may even stop buying bonds but if bond investors continue to hang in there it won’t matter. Except it will. The direction of interest rates matter…even if it takes a while for investors to figure it out.

I have recommended being out of US Treasury notes and bonds for eighteen months now. I have also recommended being out of bond funds for eighteen months now. You know we have an alternative and every day I am here looking for worthwhile bonds. Be careful out there.

Cypress – Fairbanks Independent School District, TX

Unlimited Tax School Building Bonds, Series 2021A

Aaa Moody’s (Aa1 Underlying)   AAA S&P (AA Underlying)

Permanent School Fund Guarantee Program

Due 2/15   Dated 10/1/21 Maturity 2/15/46

$125,405,000 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 2/15/31

Source: Bloomberg

This is an example of a new issue priced the week of 9/20/21

Prices, yields and availability subject to change