The Right Bond, Part 2

Interest rates on ten-year U.S. treasury notes are closing out the month of February near their highest in three months. Not so for municipals. New issue municipals, usually the driver or yardstick for other municipal bond prices and yields, continued to trade near record relative values.

While ten-year U.S. treasury yields began the month near 3.90% and spent most of the last two weeks at or above 4.25%, municipal yields went the other way. We can compare Wylie TX ISD in Collin County, on the east side of Dallas, with last month’s Wylie TX ISD in Taylor County, on the south side of Abilene. Yields are lower across the board on this week’s Wylie compared to last.

Today, February 28^th, the ten-year AAA municipal-treasury ratio was below 60% at 59.6. This ratio was consistently above 80% for the last twenty-plus years, save the past three. Asset values, including municipal bonds, were quite volatile in the period of the lockdown in 2020 when U.S. treasury yields plunged to near zero percent and bond prices hit their bull market highs. But as the market settled down, it appears investors have a desired preference for municipal bonds making the 80% ratio the new high rather than the old low.

This period reminds me of the mid-1980s. When yields on the safest municipal bonds those pre-refunded in U.S. treasury securities were hard to find and quite expensive. The narrative then was H Ross Perot decided those high-grade municipal bonds was where he wanted to reinvest the proceeds of his sale of EDS to General Motors. Pre-refunded bonds are almost always shorter-term bonds and buying short term bonds in the 1980s (or any time prior to the late-2010s) was not the place to be. Likewise, I do not see any of the maturities in either of the Wylie ISD issues as the place to be for the years to come either.

You know I will not be calling you with offerings from either Wiley school issue. That is not why I include them in the letter. I include a new issue bond scale each month to indicate a yardstick showing how ridiculously expensive (low yields) can be or the   off-chance opposite.

We are in the early years of a long-term bear market for bonds…all kinds of bonds. Your portfolio was built knowing this type of market could occur and when it did, your portfolio has performed well. You could not say that about portfolios of new issues over the past however many years one chooses. Selection matters.

Importantly, I may have some worthwhile bonds for you and when I do, I will call. Sometimes short term, but sometimes not. I continue to find worthwhile bonds and, when I do, we need to get the bonds into your portfolio.

Just like a bull market, bear markets ebb and flow, zig, and zag. It would be mighty and difficult for municipal bonds to trade at less than 60 percent of U.S. treasury yields for any length of time but they certainly can, and have, traded much cheaper.

Meanwhile it is the ten-year U.S. treasury note that is the big dog here. Trading at 5% on October 23^rd, the zag went to 3.78% on December 27^th, when everyone seemed to believe the Federal Reserve would be cutting interest rates early and often. Now around 4.25%, the next move unfolds. If the current municipal bond market is any indication, interest rates for the U.S. treasury note should move lower.

Treasuries in the low 3% area would take the municipal ratio back up to 80% without municipal bond yields needing to change from current levels. A move like that would be a nice continuation of the current correction of the ten-year U.S. treasury from 1% yields in 2021 to 5% in 2023 and then to near 3% for 2024.

Municipal bond prices have led the correction and appear to me to already be nearly fully corrected from their initial bear market move from their 2021 high prices to their 2023 low prices. Since this is a bond bear market, the next move following a price correction is new lower prices (and higher municipal yields).

For other investors, timing is everything. Other investors bought 1% or less yields on long term bonds in the past or perhaps they own 2% long bonds. Regardless, that was poor timing. The advantage of your portfolio is how timing is not everything. The bond is the thing. I hope to call you soon.

Wylie Independent School District, Wylie, TX

Unlimited Tax School Building Bonds, Series 2024

Aa1 Moody’s Under (Aaa on Permanent School Fund)

Due 8/15   Dated 3/21/24 Maturity 8/15/54

$269,145,000 Sold

Years   Maturity       Coupon        Yield*

1         2025             5.00%           2.94%

2         2026             5.00%           2.78%

3         2027             5.00%           2.62%

4         2028             5.00%           2.57%

5         2029             5.00%           2.60%

6         2030             5.00%           2.63%

7         2031             5.00%           2.63%

8         2032             5.00%          2.66%

9         2033             5.00%          2.71%

10       2034**          5.00%          2.73%

11       2035**          5.00%          2.82%

12       2036**          5.00%          2.91%

13       2037**          5.00%          2.97%

14       2038**          5.00%          3.02%

15       2039**          5.00%          3.11%

16       2040**          5.00%          3.26%

17       2041**          5.00%          3.38%

18       2042**          5.00%          3.45%

19      2043**           5.00%          3.51%

20      2044**           5.00%          3.56%

25      2049**           5.25%          3.84%

25      2054**           5.25%          3.92%

30      2054**           4.25%        4.40%

*Yield to Worst (Call or Maturity) **Callable 8/15/33

Source: Bloomberg

This is an example of a new issue priced the week of 2/26/24

Prices, yields and availability subject to change