There is an increased popularity in municipal bonds and the bond market in general lately. When you talk about bond basics, particularly with municipal bonds, you bring in all the fundamentals like maturities, quality, yield curve and interest rates for today’s current events like Pennsylvania State Higher Education Bonds and even the American Jobs Plan.
While you may be tempted to compare President Joe Biden’s infrastructure plan with President Barack Obama’s infrastructure and economic development program of 2009-2010, the two are very different regarding infrastructure.
President Obama allowed for the issuing of taxable municipal bonds for those projects and also received some federal subsidies. President Biden’s infrastructure program is confined to lending, or giving money to help build infrastructure.
“What Maturities Are You Buying?”
“Where are you buying munis?” “What part of the yield curve are you buying?” Obvious questions reflecting obvious concern over higher individual taxes not tied to Mr. Biden’s plan. The yield curve could go from one day to 30-to-50 years. Typically, it is from one month to 30 years with the Treasury yield curve. To some degree, munis and corporates all trade off whatever Treasuries are doing. We are focused on the belly of the curve – the eight-to-fourteen-year maturity range.
If you look at the yield curve, a standard normal yield curve rises very rapidly, and then, at some point, it starts to level off. So, for instance, in today’s treasury curve, a one-month T-bill is at zero. A 10-year Treasury bond is 1.60 percent. It rises 160 basis points in 10 years. Over the next 20 years, from 10 years to 30 years, it only rises to 68. It flattens.
Not Just for the Wealthy
At Hefren-Tillotson, we have never turned anybody away because they didn’t have millions of dollars to invest. Where we put that dollar amount is what makes the difference. We are interested in helping all kinds of investors. If you want to define an individual’s net worth as having $10 million, $20 million or more, yes, we work with them and a lot of others too.
We work with younger people who are developing their assets. Although they are in a lower range, generally, municipal bonds can make sense for them. For an investor looking to invest $70,000 or more over a short period of time like two or three years, the fixed income market makes sense. If they are not, they are better off looking at municipal bond mutual funds. Of course, all of this is explained in our MASTERPLAN® review or in general conversation with one of our advisors.
Most people don’t know this, but retail investors own 60 percent of the $3.8 trillion dollar municipal bonds that are out there either by muni bonds or muni bond mutual funds. That is a pretty large percentage of holdings all because of the tax-exempt interest.
Why Get Into the Bond Market?
The fixed income or bond portion of your portfolio is generally for your security and to help you stabilize. You buy bonds for income because you’ve reached a point in your life where you don’t want to risk your money anymore. You earned it, saved it and done well in the equity market.
When you start getting a little older, you cannot afford to have a 1977 happen again. You can start to allocate your assets weighted more toward bonds that have maturity dates, which have stability, and we call that moving to a “preservation of capital” mode. You get away from risk exposure and preserve your money. Primarily, that’s why you get into the bond market.
I have spent most of my life wanting the risk and growth that comes with the Dow or the S&P 500, and only recently moved to individual bonds and away from risk, because now or sometime in the future, I’ll be risk averse. Younger people would typically want to start off accepting more risk, because for them it means gaining more growth.
Your weighting when you were younger might have been 80 percent in growth stocks. Then, as you got a little bit older, you put 70 percent in growth and 30 percent in more conservative assets like bonds, then 60/40, and 40/60 and so on.
Over the past three years, we have been in a very low interest rate environment. Federal Reserve Chairman Jerome Powell doesn’t think he wants to change that. He is talking 2023 or 2024. I looked at a forecast by more than 50 analysts on where the 10-year Treasury is going to be each quarter through March 2023. Currently, at a 1.61 percent yield, these analysts are slowly progressing to 2.37 percent in 2023. In my opinion, that’s a very slight rise.
If you look at the bond market and think interest rates are going to rise, due to economic growth, inflation or whatever reason, then you want to take a very hard look at being a little shorter now than the 8-to-14 years. You want to place in your assets shorter-term bonds so they will mature when you think – and we think – interest rates are going to rise. You will have that cash back and you will hopefully be able to reinvest that in higher rates at that time. If you have questions or need more information contact me Hefren-Tillotson.