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The fixed income party is now over. While everyone seems to believe the Federal Reserve will keep rates lower for longer, I believe this will not be the case.

Not Lower For Longer

May 7th, 2020 by Kurt L. Smith
  • Last month’s letter highlighted the opportunity available in managed fixed income funds. March 6th was a pivotal moment with record low US Treasury bond yields and historically low spreads for other bonds, such as municipals, that I believe fixed income fund performance may be negative for years to come.

    The high prices for bonds on March 6th, I believe, are the bond corollary for the record highs in stock prices in February. The dramatic swoon down in prices in early March affected both asset classes. Diversification between the two offered little safety.

    Now, approximately six weeks from the March lows, prices have bounced back strongly. Taking a long-term approach, both stocks and bonds remain near their record highs. Looking backwards, the patient investor appears to be sitting in a good place atop decades of bull market bond and stock performance.

    So now you can add stocks to last month’s bond opportunity. There is nothing new here as I have been saying this is the end of the stock and bond bull market for many months now. For those of you waiting, we have now seen additional mileposts: March 6th for bonds and historic February stock prices leading to the March plunge in both, especially for stocks. These events are not to be ignored, rather they are screaming signals for action.

    Reading my letters you may notice an absence of narrative. My stance on the end of stock and bond bull markets was not predicated upon a virus appearing; they predate Covid-19. Nor did my stance depend on who was running the Federal Reserve or what he may or may not do with the powers at his disposal. My stance is based on what the market’s price action is dictating.

    As much as I would like the thirty-plus year bull markets for financial assets to continue, price action tells me otherwise. Crisis comes from the lack of preparation and the lack of imagination and I know my readers have both of these. Hoping that prices somehow continue higher is not a plan; acknowledging that they might not, imagining those repercussions for you and your portfolio, and taking action is indeed called for.

    The odds of a pandemic spreading across the United States may have been low. But the costs to the US economy, if one did, dictated the need for a plan and a ready response. The same is true for your portfolio. The odds of stock and bond prices cratering from here could not be foreseen years ago. But now that we are here, with an abundance of market price action behind us, the chance this could happen has become much more probable in my eyes.

    This is what March 6th is all about. Who would have thought over the past thirty-plus years that double-digit interest rates would eventually go below one percent? Yet they did and this is important for investors who, knowingly or unknowingly have aligned their fixed income investments with the presumption the bond market bull market would continue.

    The fixed income party is now over. While everyone seems to believe the Federal Reserve will keep rates lower for longer, I believe this will not be the case. That few believed stock prices would fall this year did not negate thirty-five percent drops in the Dow Jones Industrials and S&P 500 averages (per Bloomberg).  Nor was the Federal Reserve able to prevent it.  The past is the past but what is important is that you look ahead knowing that possibilities exist.  For me it is probable bond and stock prices move below their March lows, but if I can move you to possible then I am making headway.

    Do not just take my word for it.  Take a few minutes to read about Warren Buffett’s Berkshire Hathaway annual meeting this past weekend.  Check out Andrew Ross Sorkin’s piece in the New York Times. “(A)nything can happen in terms of markets,” said Mr. Buffett.  He has taken some decisive action and you should too.

    Fort Bend Independent School District, TX

    AAA S&P (AA+ Under) AAA Fitch (AA+ Under)

    Permanent School Fund Guaranteed

    Due 8/15 Dated 4/15/20 Maturity 8/15/50

    $167,050,000 Sold

    1            2021          5.00%           0.96%

     2            2022          5.00%           1.07%

     3            2023          5.00%           1.17%

     4            2024          5.00%           1.22%

     5            2025          5.00%           1.30%

     6            2026          5.00%           1.40%

     7            2027          5.00%           1.47%

     8            2028          5.00%           1.56%

     9            2029          5.00%           1.61%

     10          2030**      5.00%           1.67%

     11          2031**      5.00%           1.76%

     12          2032**      3.00%           2.26%

     13          2033**      3.00%          2.36%

     14          2034**      3.00%           2.41%

     15          2035**      3.00%           2.46%

     16          2036**      3.00%           2.52%

     17          2037**      3.00%          2.59%

     18          2038**      3.00%          2.64%

     19          2039**      3.00%          2.69%

     20          2040**      3.00%          2.75%

     21          2041**      3.00%          2.81%

     22          2042**      3.00%          2.85%

     25          2045**      4.00%          2.58%

     30          2050**      3.00%          3.00%

    * Yield to Worst (Call or Maturity) ** Call 8/15/29

    Source: Bloomberg

    This is an example of a new issue priced the week of 4/27/20

    Prices, yield and availability subject to change


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