Marilyn Cohen’s Bond Smart Investing: Decimal Dust by Envision Capital Management
The definition of decimal dust: The Federal Reserve raising short term rates by .25 = 25 basis points = 25/100 = not a high enough interest rate increase to matter.
For those of us 60 and over, we vividly remember interest rate rises in: 1979-1981, 1983-1984, 1986-1987, 1993-1994, and 1998-1999. These were big.
The economy was generally producing well in excess of 3% GDP. Home and car sales were great. And inflation was a big problem. Now it’s true that many are saying a 25 basis point move may well be the start of a move by the Fed to rising interest rates. My response is, really? Is US economic growth so mighty, so awesome, and growing with such momentum that multiple interest rate hikes are needed? Doubtful.
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The Fed with its dual mandate—full employment and 2% inflation—has lost its way. While the voting members of the Fed elbow each other for airtime on the issue, market volatility is responding as if interest rate Armageddon is approaching. It is not.
With dollar strength already anticipating higher rates, a stronger dollar will cause earnings to decline for the big multinationals. How can exports and multinational corporate earnings have momentum? Especially when the countries comprising the global economy are so over burdened by debt that their GDPs have slowed. Their currencies are now so much more attractive. All these things allow their exporting mojo to return.
So what should a conservative Baby Boomer do? Stay local and invest in tax-free municipal bonds. Not funds. Not ETFs. But the individual bonds. When the trigger fingered scaredy cats exit those funds en masse Net Asset Value will either decline or get nuked; not because the 25 basis point anticipated rise is so large, but because the fear is palpable.
As you know from reading all the current financial publications, all munis should not be treated equally. Stick with the crème de la crème—revenue bonds exclusively targeted to essential services. Be careful with General Obligation bonds. The unfunded pension liabilities finally matter to municipal bonds market investors.
Here are just some of the many excellent municipal issuers we believe you can count on:
Texas PSF School bonds; California Statewide Community Development Authority for Kaiser Permanente; Oregon State Housing; San Francisco and Los Angeles International Airports Revenue bonds Senior Liens; New York Personal Income Tax (PIT) bonds; New York Housing Development Corp. Revenue Bonds; Tennessee State GO; Fairfax County Virginia Sewer Revenue.
These individual high quality municipal bonds will be less reactive to the anticipated 25 basis point move. Decimal Dust is coming our way. Municipal bonds taxable equivalent yield can match many of the dividend yields generated by the biggest blue chip multinationals but will hold their value better.
The best of these market moves are behind us. Don’t anticipate a bond market debacle. But just perhaps a little Decimal Dust in your future.
About Marilyn Cohen
Marilyn Cohen is one of the financial community’s most respected fixed income securities experts. She has been a Forbes magazine columnist for 18 years and is author of Surviving the Bond Bear Market: Bondland’s Nuclear Winter published by John Wiley & Sons, Inc. Marilyn is a sought after expert appearing on Nightly Business Report, CNBC, Fox Business News, National Public Radio and other business shows as well a frequent authoritative source for the Wall Street Journal, New York Times and Barron’s. She is the CEO of Envision Capital Management, Inc. a money management firm specializing in separately managed fixed income portfolios for individuals. Minimum account size is $500,000.