Notes on Bonds

Since the Fed started raising short term rates, it's called for a change in portfolio strategy. While the long end of the yield curve, represented by the 30 Year Treasury, has gone from 2.78% at the beginning of 2018 to around 3.38% as of this writing, the real jump is on the short end, as the 1 year rate has jumped from 1.81% to 2.68%, currently. That's made formerly unattractive propositions more plausible today.

One such welcome development are the new opportunities in government backed collateralized mortgage obligations. Before the financial crisis, these were extremely popular with investors, but post crisis low rates made the offerings unattractive, especially when compared to dividend yields that offered qualified tax advantages. Today, an investor can get a monthly interest payment that easily surpasses FDIC backed CDs, with strong guarantees on principal and payments. There has also been some other government agency issuance, free of state and local taxes along with short maturities, that make for a great place to park funds. These require a bit of luck and a quick finger on the trigger to snag them.

In the municipal space, a modest rise in rates on the long end has caused some excitement among professional analysts, but for the retail buyer, 30 year maturities at what are still historically low rates, are less than appetizing. So if an investor is looking to maximize yield, looking for special situations is the way to go. It takes a long time to gain a familiarity with different types of offerings, their guarantees, and individual municipalities and districts, so an experienced hand is helpful here. But there are opportunities out there to get strong tax free yield without a decades long hold time.

The same is true of many corporate bonds. Well rated bonds like Exxon Mobil, (Aaa/AAA) maturing in 2046, yield about 4.1%, priced at Par, about inline with the average.

That's a long time to tie up funds for a company that may even face some serious challenges in the years ahead. (See General Electric.) The government backed mortgage paper, for example, can handily beat that return with a far better risk metric along with shorter duration. For high yield (“junk”) bonds, pricing is also very firm, and many times, the investor is not getting paid for the risk, However, there are still values to be found if you know how to spot the value. The old saying “know what you own” certainly applies here. The "on again/off again" nature of the energy markets distorts the aggregates and indexes. Again, following trends in the fortunes of individual firms for an extended period of time helps, and with some diligence, strong yield flows can accrue to the investor to either re-invest, build assets, or help pay off school loans and mortgages.

With the stock market suddenly looking sour, remember that the bond market, along with associated income offerings, can provide safety, return, appreciation, as well as a regular flow of funds to the retail investor.

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FloMartin Securities, Inc.

Donald R. Davret, Investment Advisor Representative

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