Performance Matters

It is the new year and with optimism gripping the financial world ebullience is everywhere. Contagion? Evidently because everyone is excited for the new year, the new administration, new tax laws, less regulation…a veritable Shangri-La here at home.

Unfortunately, the bond market failed to get the message. Or perhaps it did; just think about how bad the bond market would be if there was not a contagion of optimism?

The scorecard for 2024 is now out and bonds were not the place to be. Not just compared to the one-two punch of stocks for the second straight year, but as a standalone asset class. Bonds should yield something, particularly when people are buying them left and right because, hey, they now yield something.

The results say otherwise. For the year, the Bloomberg US Treasury Index clocked in with a +0.58% gain for the year (all prices and yields per Bloomberg).  If we add Corporate Bonds and Mortgages to the mix, the Bloomberg US Aggregate Bond Index finished up 1.25% for the year while the Bloomberg Municipal Bond Index, a highflyer almost year all year as we discussed in the October 28^th letter when up 9.81%, finished up a mere 1.05% for the year.

Longtime readers know this is not a new phenomenon. Performance figures in a bond bear market are difficult because the wind (the trend towards lower interest rates) is no longer at your back but instead buffet you in the face (as the trend is toward higher interest rates). It has been almost five years since the bond bear market began in March 2020. In now appears we are almost halfway through what is shaping up as a lost decade of bond market performance.

Expanding our performance horizon to five years results in negative results for the Treasury Index at -3.46% for the period. The Aggregate Index finished lower as well at -1.61%, while the Municipal Index clocked at relatively stellar +5.05% for the five years, about the same as the annual performance for 2024, up about 1% per year. Yet through it all, investors continue to hold or increase their bond holdings. Perhaps the almost double-digit performance of bonds going into the fourth quarter of 2024 was enough to keep optimism high. The trend is your friend except when your trend is a bond bear market.

Bond market returns are even worse than the depressing figures above. The indexes do not account for management fees which are not always low, but it is not just the fees that will kill you. The real problem with bear markets is that asset management is done at scale. You do not want to own scalable assets in a bear market.

Let me explain. When investors own assets today, they are managed assets. You are buying a number of bonds, an exchange traded fund (ETF), or a mutual fund. The assets are managed, by a manager, and the result is your piece of the asset class usually reflects the asset class, whether your piece is thousands, millions, or even billions of dollars.

In a bull market, we want to own assets performing well, like technology for example. Everyone in technology would likely own the Magnificent Seven for example, whether these stocks are each worth a trillion dollars or more (or less). Your investment scales, up and down, but primarily in a bull market. Bonds work the same way. Whether treasuries, corporates, or municipals your portfolio will look like everyone else’s portfolio. This is by design (thank you, Wall Street) and it applies to all their clients, whether you are an investor with thousands, millions, or even billions of dollars.

Which is why the bond bear market market applies to all bond investors, not just an unlucky few. We know this because all bonds are owned by some one or some entity and we also know that there is almost every thing in the bond world that is similar and very little that makes them different.

Except your portfolio of municipal bonds. Your portfolio is unique and the primary reason is because of selection. Your portfolio does not scale as it would at Wall Street houses. I cannot help you build your portfolio at a Wall Street firm because it is not their model. Their model is a scalable, bull market creation which also is a powerful business model…for them.

The reality of your performance for 2024 was much better than the market. The reality of your performance for each of the past five years is also very different. Your statements reflect your reality. We are not praying for a the continuation of something that ended years ago; we are investing, by selection, in municipal bonds that we believe to be worthwhile in today’s changing world. That is what The Select Approach^TM has always done for you.

Caddo Basin Special Utility District, TX

Utility System Revenue Bonds, Series 2025

A+ S&P Under (AA on BAM wrapper)

Due 9/1   Dated 1/16/25 Maturity 9/1/54

$12,000,000 Sold

Years   Maturity       Coupon        Yield*

1         2025             6.00%           3.25%

2         2026             6.00%           3.15%

3         2027             6.00%           3.05%

4         2028             6.00%           3.05%

5         2029             6.00%           3.10%

6         2030             6.00%           3.15%

7         2031             5.00%           3.20%

8         2032**          4.00%          3.30%

9         2033**          4.00%          3.35%

10       2034**          4.00%          3.40%

11       2035**          4.00%          3.50%

12       2036**          4.00%          3.60%

13       2037**          4.00%          3.70%

14       2038**          4.00%          3.80%

15       2039**          4.00%          3.90%

16       2040**          4.00%          4.00%

17       2041**          4.00%          4.05%

18       2042**          4.00%          4.09%

19       2043**          4.00%          4.13%

20       2044**          4.00%          4.16%

21       2045**           4.00%          4.182%

22       2046**          4.00%          4.176%

23       2047**          4.00%          4.172%

24       2048**          4.00%          4.167%

25       2049**          4.00%          4.163%

26       2050**          4.00%          4.159%

27       2051**           4.00%          4.156%

28       2052**          4.00%          4.153%

29       2053**          4.00%          4.15%

30       2054**           4.00%          4.147%

*Yield to Worst (Call or Maturity) **Callable 9/1/31

Source: Bloomberg

This is an example of a new issue priced the week of 12/17/24

Prices, yields and availability subject to change