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So far the bond bear market has been but a slow moving train wreck. On a daily basis, not much different from yesterday, but over several months and now several years, it is only slowly that others are coming to the realization that this bear is beginning.

Slow Moving Bear

October 9th, 2018 by Kurt L. Smith
  • Having a plan and executing it can be worthwhile in a market in which yields on almost all bonds are rising and their prices are falling. Three quarters into 2018 and yields are up and prices are down on almost all kinds of bonds and across all maturities.

    Take a look at this month’s featured municipal bond issue, Eagle Pass, TX, below, and compare it to January’s yields. Yields are higher across all maturities, from short-term to long-term, of at least one half of one percent.  Higher yields mean lower bond prices but yet that message is not is not making a huge dent in performance.  The reason is speed.  Yes, interest rates are up but the speed of change has not had an appreciable negative effect on bond market performance.

    Looking at municipal bond indexes we see this.  The S&P Municipal Bond Index is essentially unchanged from January 1st.  Same for the Bloomberg Barclays Municipal Intermediate to Short Total Return Index or their US Municipal Bond Index for that matter (all per Bloomberg).  Check your favorite yardstick and compare.  The reason this is so is because the interest earned so far has been keeping up with principal (price) loss.

    So far the bond bear market has been but a slow moving train wreck. On a daily basis, not much different from yesterday, but over several months and now several years, it is only slowly that others are coming to the realization that this bear is beginning.  So far the momentum of downward price action has been too small as to hardly be noticed.

    The Select ApproachTM was built to help investors navigate not only bull markets in bonds but especially bear markets. Selection is key because liquidity in bond markets can, and does, evaporate quickly, for weeks or even months. Selection is key because higher interest rates may adversely affect a bond’s market value, some bonds more than others.

    Calling the bond market bear in 2012 has given us several advantages. First, we did not load up on long-term bonds believing that we would have lower interest rates for longer. We haven’t experienced lower for longer; we are instead experiencing higher rates for longer.

    Second, we want to select bonds that provide built-in liquidity. By avoiding long-term bonds that lock in low interest rates for many years, we build portfolios which turn into cash so that we can reinvest in the higher yields down the road.

    We remain highly selective which means we may at times have more cash than worthwhile bonds to invest in. Earlier this year, when we were in the midst of a counter-trend rally (yields moving lower for several months despite the trend higher), we didn’t want to have much cash. Over the past couple of months, rates are again on the move higher so waiting for the right bonds can be worthwhile.

    This recent move to higher rates may be the precursor to the bond crash of 2018, or like the previous nine months, not. The liquidity of your portfolio, along with your current cash position, together should provide us with the resources to take advantage of such an event as well as provide us with the confidence that selection is key in the unique municipal bond market.

    Unlike investors in other types of bond investments you do not have to decide when to sell or how to sell. We have had a plan and been executing it for years now. Nor have you been lulled to sleep wondering what is different about the bond market today versus yesterday, or worse, waking up to the startling realization that the bond market is in a bear market. You are prepared and when the reality hits others you can remain calm.


    Eagle Pass, Texas GO

    S&P AA- Under (AGM Insured)

    Due 3/1 Dated 9/15/18 Maturity: 3/1/2038

    Sale Amount: $29,110,000

    1 2019 5.00% 2.04%
    2 2020 5.00% 2.13%
    3 2021 5.00% 2.25%
    4 2022 5.00% 2.36%
    5 2023 5.00% 2.47%
    6 2024 5.00% 2.61%
    7 2025 5.00% 2.72%
    8 2026 5.00% 2.83%
    9 2027 5.00% 2.94%
    10 2028 5.00% 3.04%
    11 2029** 5.00% 3.11%
    12 2030** 5.00% 3.16%
    13 2031** 5.00% 3.22%
    14 2032** 5.00% 3.25%
    15 2033** 3.50% 3.72%
    16 2034** 5.00% 3.35%
    17 2035** 3.75% 3.92%
    18 2036** 4.00% 3.87%
    19 2037** 4.00% 3.93%
    20 2038** 4.00% 3.97%

      *Yield to Worst (Call or Maturity) **Par Call: 3/1/2028

    Source: Bloomberg

    This is an example of a new issue priced the week of 10/1/18

    Prices, yields and availability subject to change


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