Scratching & Clawing

My firm belief that market conditions will (eventually) change gives me the optimism to approach each day as if today is that day.  Then comes my monthly Municipal Market Letter writing day and of course it seems as if nothing has changed…ever.  The first quarter of 2014 is gone and what has changed?  While I know that this is not altogether true, the mileposts seem to be moving hardly at all.

Thankfully the municipal bond market provides something, a little something, each and every day.  My optimism each morning is usually met with astonishment later in the day that, wow, we were able to find a needle or two in that haystack.

Sure I wish the municipal market will eventually breakdown and provide us with a plethora of opportunities, but I must confess these are indeed worthwhile times.  Bonds do trade and we are in the mix.  Compared to the items we hunt each day, we are bagging a fairly high percentage and for this I am thankful, grateful and amazed.

I believe we are blessed that not all municipal bonds are structured and look like the Klein ISD bonds below.  All the bonds shorter than ten years are noncallable and the credit quality is next to superb.  The municipal market doesn’t need our help to sell these, so thankfully we can spend our time, and your time, on something a little more productive.

In a seemingly never-changing investing environment, particularly one in which hardly any issuer gets into trouble (let alone defaults), finding worthwhile bonds should be quite easy though differentiation is probably nonexistent.  It is easy to buy treasuries, corporates and even junk bonds because so little change appears to be happening.  Yields are low and prices are high – nothing new here – and with little volatility there is little differentiation.  Every five year bond in this type of environment would be deemed good so you might as well just go with the best yield you can find.  There must be something to this approach as many seem to be following it.

Municipal bonds, particularly old (used?) municipal bonds can offer something different, especially in a world that increasingly looks all alike.  This is what we set up camp every day seeking to find.  With tens of thousands of outstanding CUSIPs, we just need a few to decide that they would rather trade their CUSIP for cold cash, so that is what we offer them.  We are not helping issuers build a project or even refinance one; we are providing investors with the liquidity (again, cash) so they can move on down the line while we enjoy their (old) bond for the duration.

Unfortunately the bonds investors are looking to sell do not come in unlimited size.  Their bonds are of finite size, usually between $5 thousand and $5 million, and no wishing can turn a small quantity into a larger one.  I should know.  I do a lot of wishing.  Though every now and then a small quantity does (seem to) beget a larger quantity and sometimes bond nirvana even unfolds.

Discovering small gems can be rewarding.  We must perform due diligence on all our bids and purchases.  Such knowledge on smaller pieces can therefore be key when larger quantities present themselves, particularly if time is of the essence (and it generally is).  It is particularly gratifying to find bonds that we can continue to buy at worthwhile yields for years and years down the road.

They say you have to kiss a lot of frogs to find a prince.  Well, if that is what it takes to find wonderful municipal bonds then that is what we are going to do.  We have discovered you can be more successful if you know where to look and you take advantage of every possible opportunity.  Therefore we do bid a fairly large number of items we think may have the potential to turn into princes and these are the items that hopefully become prominent on your monthly statements.

All in all we continue to be hopeful for our future finding worthwhile municipal bonds because our past has been rewarding in finding such bonds.  Even in times in which we could be lulled to sleep because seemingly nothing is happening, we are finding worthwhile municipal bonds for your portfolio.  Interest rates are no longer trending lower, they just don’t always move upward even when that is the new trend.  But we have much to be thankful for and much to be grateful for as our bonds are usually working better than those short Klein ISD bonds below.